Why are pools formed?
Pools are formed with the basic objective of maintaining an effective control over prices. Members associate themselves to regulate the demand side or supply side factors of a product without surrendering their separate entities.
The agreement may relate to:
- Regulation of output
- Re-allocation of output
- Common control of patents etc.,
Features of Pools
The following are the features of pools:
1. A pool is formed by a federation of business units with the basic objective of controlling prices.
2. Member units in the pools retain their autonomy.
3. In order to control the price, member units may form an imaginary pool of output. Such an imaginary pool is then re-allocated to the member units in an agreed proportion.
4. Pooling arrangements contain definite penalties for those violating the terms of the arrangement.
Types of pools
The pool organizations can be broadly classified into the following categories
In output pools, manufacturers in the same industry join together to regulate and restrict production in order to maintain prices at profitable levels. The association estimates the current market demand and fixes output quotas for each member unit.
The member units should produce only up to the quota allotted and sell it at the price fixed by the association. Penalties may be levied on any member unit producing more than the allotted quota. All expenses connected with running such an association are met by the members of the association.
In the words of L.H. Shields,
A conference of this type is a combination of shipping lines organized for the purpose of regulating and restricting competition on definite routes.
Organizations engaged in the transportation of goods (airlines, railways, shipping companies, road transport agencies) associate themselves to form a traffic pool.
The primary objective of traffic pool is to reduce competition by allocating specific areas for each member unit. Shipping conferences is a popular example of traffic pools. It is a combination of shipping lines organized with the basic objective of restricting competition. To achieve its purpose the conference might fix uniform freight rates and allotment of certain ports of call. The number of sailings and the volume of traffic may be fixed by the conference.
To avoid competition from non-members the deferred rebate system is adopted in traffic pool. The shipper would be credited with a certain percentage of the freight as rebate if he regularly transports his products through that company which is a member of the conference.
The rebates are announced at periodic intervals (six months or one year). The rebate would be given to the shipper only if he transports his products through the conference member’s vessel for a further period of similar duration.
Market pools are formed to control prices by pooling demand and allocating it among its members. The idea is to guarantee sales to each member. The entire market is divided among the members in any of the three ways:
- by customers
- by products and
- by territories.
Customers: In the case of market pools formed on the basis of customers, certain customers are allotted to members by the association. Members would not deal with customers allotted to other members.
By-products: In the case of by-products, each member would be granted monopoly to deal in a specified product.
Territories: In the case of territorial pool, the total market is divided territory wise and members are given the right to deal in specified territories.
Income and profit pool
In an income pool, members of the pooling association are required to deposit a high percentage of the gross receipts in the common pool. These pooled earnings are then re-distributed among members on an agreed basis. In the case of a profit pool, members pool together the profits which are then distributed among them.