Informal Agreement | Reason | Advantages | Disadvantages

Trade associations and Chambers of Commerce play an important role in promoting trade and commerce. They serve as a forum for businessmen to come together, exchange views and discuss issues relating to the economy and industry. But, trade associations and Chambers of Commerce are of no use with regard to regulation of competition. They do not bind business units to attain some common purpose and do not play any role in regulating competition. To regulate competition and bind members for attaining some common purpose informal agreements are used.

Reasons for forming Informal agreements

Informal agreements can be formed for:

  1. Regulating output
  2. Price fixation
  3. Regulating terms of credit allowed to customers
  4. Division of markets etc.,

Such agreements are tacit in nature and no written documents are prepared. They are dependent on the truthfulness and sincerity of the members adherence to the agreement and are referred to as ‘Gentleman’s Agreement‘ or ‘Working Agreements.’

Advantages of Informal Agreements

1. The main advantage of informal agreements is that no formal procedures are involved and they can be concluded with ease. There are no specific formalities or expenses in concluding these agreements.

2. Members derive the benefit of less competition enjoy of monopoly status.

3. They are flexible in nature and can be adapted to changing business situations. These agreements can be modified according to the changes in consumer demand, and market conditions.

4. Member units retain their freedom with regard to the internal management of their business.

Disadvantages of informal agreements

The disadvantages of such informal agreements are

1. They are unstable in nature and therefore short lived. Members may violate the terms of the agreement if they feel that their business interests are affected.

2. Since the informal agreements are formed secretly, the public are suspicious about them and condemn them.

3. If the sellers allocate the customers among themselves, a customer cannot go to a seller of his choice. He might have to buy goods from a particular seller to whom he has been allotted. This greatly affects customers choice with regard to from where they wants to make purchases.

4. There is no restriction on the supply. This may lead to unsold stock and wastage.