PART IV

THE ORGANIZATION OF THE MARKET AND THE MARKET PRICE

CHAPTER 9

Trade Associations

Trade associations are voluntary, non-profit making organizations formed by business enterprises to protect and advance interests common to all. They can cover a whole industry, such as the British Iron and Steel Federation; or a certain area of trade, such as the Food Machinery Association; or a particular product, such as the Fish Hook Makers Association. Of particular interest are those trade associations of competitors in a given market or, more generally, product group or industry which have banded together to present a united front. Their primary purpose is to organize the conduct of the market (product group or industry), within the competitive system and on the basis of maintaining the essential independence of the enterprises involved, so as to make the enterprises more efficient and the "market place" more orderly. In particular, they are to promote market stability in terms of production and prices by preventing the build-up of unsold inventory or unused capacity, radically changing market shares, and destructive price competition, to spread such trade information that would make for intelligent or reasonable competition, to eliminate unfair business practices, and to reduce costs both on the technical and commercial side. To achieve these goals, trade associations take on various forms depending on the problems involved and the state of law. There are trade associations which simply set prices while others only allocate output among its members. Then there are trade associations, called cartels, which fixed prices and allocate output among the member enterprises. Finally, there are trade associations, called open price associations, which deal with the dissemination of past price information.

Organization and Management

A trade association generally has a constitution or memorandum and articles of association which sets out its objective or purpose, area of coverage, membership and organizational structure, procedures on elections, meetings, making decisions and policies, and enforcing agreed upon policies, finance, activities, and relationship to other trade associations, its duration and conditions for dissolution.

Legally, a trade association may be a company, an unincorporated body, or a trade union. If the a trade association is incorporated it almost always adopts the legal form of limitation by guarantee. In this case, each member guarantees to contribute a certain sum in the event of winding-up, but there is no share capital and no profit-making is allowed. The advantages to a trade association which flow from registration as a company arises from the legal personality it acquires. Though associations are not trading concerns they may have need to make contracts of a commercial character, such as to own property, to make contracts, and to sue and be sued in their own name. It also makes possible the amendment of the objects of the association without the completely unanimous support otherwise required. The only disadvantage of company status, to an association which is eligible, appears to be that certain documents must be available for public inspection. Thus the memorandum and Articles of Association, and annual returns giving the list of directors and the year's accounts must be sent to the Registrar of Companies and these are available to the public. In addition, these documents must give the address of the officers of the association. The major constraint on becoming a company is that the trade association can not have as a major activity the restraint of trade.

Section 16 of the Trade Union Act Amendment Act, 1876, defined a trade union as meaning

Thus if the major purpose and activity of a trade association is the restraint of trade, then it is a trade union. As a result, according to Section 5 of the Trade Union Act (1871), a trade union may not registered under the Companies Acts or under the Friendly Societies Acts or the Industrial Provident Societies Acts. However, they may register themselves as trade unions or become certified as a trade union with the Registrar of Friendly Societies. The organizational advantages of being registered as a trade union is that the trade association can be sued and can also sue in its own name, is able to hold property through trustees with full continuity, and is able to make contracts in its own name. On the other hand, the trade association is obliged to lodge with the Registrar a copy of the rules and of any amendments and to make annual returns of accounts and officers to him; and these are available for public inspection. Certification is a simpler matter. It merely involves satisfying the Registrar about the objects of the trade association. It does not entail either the privileges or the obligations of registration and its purpose is merely to assure the trade association and, if necessary, the courts, that it is in fact a trade union.

Being a registered or certified as a trade union means that the trade association is immune from liability in tort. This immunity means that any association which injures others by its restrictive activities cannot be sued for conspiracy, defamation or any similar matter, and none of its harmful actions, if intra vires, can be questioned in a court of law. The protection of the Act extends only to the trade association itself, and not to members or officials; but the wording suggests that it even covers torts about to be committed; and that it prevents, therefore, injunctions to restrain trade associations from committing these acts. Initially, being a trade union also meant that, under the Trades Union Act of 1871, the courts would not directly enforce agreements between members about conditions on which they transact business, or agreements to pay subscriptions or penalties. However, by 1920 the situation had changed so that the Courts would not enforce unreasonable restraints on trade while enforcing the reasonable ones.

The majority of trade associations are neither companies nor registered or certified trade unions. While a number of the trade associations would be classified as trade unions quite a number would not. These informal trade associations have no corporate legal existence. This means that property must be held for the trade association by a trust or by individual members. In most circumstances the council of the association would find themselves fully liable for all actions which they have authorised, including any contractual ones. The trade association cannot be sue or be sued in its own name. Finally, in theory every member must consent to the trade association's actions and to changes in its rules. But these disadvantages do not appear to important to enterprises since trade associations do not often own much property, enter into many contracts, would rather do without the right to sue or be sued and indemnify the individuals held responsible instead, and members are willing enough to consent to any acts on which a majority of the association decides.

For those trade associations which are incorporated, their constitutions are set out in their Memorandum and Articles of Association; those trade associations which are registered or certified as trade unions have a full constitution in their rules; and those trade associations which are informal will have less formal and shorter documents. Central to all constitutions are statements which establish the objective of the trade association, determine membership and relevant geographical area, organization and management, method of reaching association decisions, and finance. Essential to all forms of trade associations is the statement of purpose or types of activities it will be engaged in. If the trade association is incorporated, its Memorandum and Articles of Association will state its purpose, such as for the Tyre Manufacturers' Conference Ltd.:

On the other hand the Memorandum must clearly state that the trade association eschews any activity in restraint of trade, and in fact the Memorandum will often include some such phrase as "not to act as or carry on the business of a trade union". On the other hand, those trade associations which are registered or certified as trade unions explicitly state in their purpose that they are engaged in restrictive trade practices. For example, one object in the Rules of the Notts Lace and Net Dressers Association was

And another example is the Rule of the National Association of Crankshaft and Cylinder Grinders which was to

Finally there are the trade associations which are not incorporated, registered or certified in any way and their statement of purpose may include restrictive practices or prohibit them. For example the Society of British Soap Makers state:

On the other hand, the British Silk Throwsters Association stated as its object:

Similarly, the object of the Cold Rolled Brass and Copper Association is "to fix the prices and terms on which the manufactures of the Members shall be quoted for and (or) sold."

Membership of a trade association is generally open to any geographically relevant enterprise engaged in the line(s) of business covered by the association, which will agree to comply with the provisions of the constitution and by-laws and other rules of the organization, and to pay the required subscriptions and fees. For example:

The organization of a trade association consists of an administrative structure which deal with the day-to-day affairs and a governing structure. The former can be very informal and has been done as a secondary activity by a member enterprise. That is in some cases it is agreed that the necessary secretarial work for an association shall be carried out by each of the member-enterprises, or each member of the governing body, in turn. Or, alternatively the administration of the association's affairs may be put permanently into the hands of one of its members. if the work involved is at all substantial the association may make some payment to its member for these services. The administrative structure of many trade associations around 1900 was indeed like this, but by the 1950s this had changed. Instead of trying to do the administrative activities in-house, associations have hired specialists to do the tasks. In some cases, trade associations have made arrangements with major chambers of commerce or federations to carry out the secretarial work. The practice of these large organisations is to allocate members of their staff to take charge of association work. In other cases, trade associations will band together to share accommodation and employ staff in common. Further, an association may have an enterprise of accountants to carry out the secretarial duties. Finally, made trade associations establish their own administration to carry out the secretarial duties.

In this last case, the constitution of the trade association usually establishes the administrative structure as well as its principal officials. The head of the administrative side of the trade association generally goes under the name of director or secretary and is independent of the enterprises in the association. One of the major duties of the director is to supervise the day-to-day administration of the services which the trade association provides for its members. In addition, the director usually plays a part in the determination of wider policy. Associations find they need to employ high-quality staff not only for their general advantage but also in order to meet government departments and other bodies with officials of equivalent calibre. But the discretion allowed to these officials varies considerably from association to association. Some directors work with the minimum of references to governing bodies, and have considerable influence on the determination of policy. Others seem expected to consult their chairman or even their executive on every point that departs at all from routine. Below the director there can exist a variety of personnel, including heads of departments dealing with statistics, legal advice, and standards, architects, engineers, research workers, technical assistants, public relations officers, general office staff, depending on the daily and long-term services desired by the member enterprises of the association.

The governing structure of the trade association is set out in the constitution. It generally consists of a council, executive committee, committees, and general meetings. The main governing body is the council which has the power to make all decisions necessary to the running of the association; on the other hand, the executive committee is derived from the council and is generally charged with overseeing the daily affairs of the trade association. To assist the council and the executive committee, various specialized committees are usually established. These committees deal with financial, technical, standardization matters as well as with prices and members complaints regarding violations of association rules and agreements. The members of the trade association exercise control over the policies of their organization by electing the governing bodies, not by meeting and making decisions themselves. This election occurs at the annual general meeting. The general meeting is also where general policy debate occurs and policy resolutions are passed.

General Activities

Trade associations undertake a range of activities for their members which can be broken down into three areas: putting the views of their members before other bodies, providing common trading and commercial services for their members, and regulating market activities.

The representational activities includes dealing with government departments, public corporations, and suppliers and customers. The recognition of the need for collective representation on the part of industry has been a principal motive for the formation of many trade associations, and as stated in their constitutions, one of the chief objects of trade associations is to make the views of their members known to the government of the day. Indeed, most trade associations specifically refer, in their constitutions, to the need of the industry in question to speak with one voice in negotiations with government departments; to promote helpful, and resist unfavourable, legislative and administrative developments; to co-operate with government departments; and to act as a channel of communication between government departments and trade. Some of the topics that are discussed between trade associations and government departments include promotion of exports, import licensing, taxes, tariff negotiations, health and safety regulations, technical and research problems, and statistics. For those government departments which buy goods and services from the private sector, the topics that are discussed with trade associations include the conditions and terms of contracts, prices, tendering procedure and allocation of orders among suppliers, standards and specifications, and guarantees of workmanship and materials. Trade associations will also have contact with public corporations, such as the National Coal Board and Central Electricity Authority, who buy significant amounts from their members which includes regular meetings at which many things are discussed including prices.

Trade associations numerous trading and commercial services for their members. The activities fall into three areas. The first is promotional and publicity work in which the association channels information from their industries to their markets. The work includes organizing exhibitions and displays; producing press releases, pamphlets, directories and buyers' guides; developing advertising campaigns; giving advice to members about advertising media; and providing technical information and advice on the applications and use of their members' products. The second area involves collecting trade information and statistics and their dissemination to their members, together with the provision of services which facilitate members' trading activities. For example, a number of the larger associations have overseas departments which handle export matters. A few have permanent representatives in their chief export markets, while others organize overseas visits by their members, or disseminate reports about trade conditions overseas. Among the services provided by these association which have a considerable exporting interest are the circulation of statistics and market intelligence; fairly continuous contact with government departments on the preparation of briefs for trade negotiations, the lodging of objections to increases in overseas tariffs and so on; and an information service for members' individual inquiries. Smaller associations which do not have special staff dealing with exports may simply circulate overseas information in their bulletins and deal with individual inquiries as they arise. Trade associations also provide trade statistics concerning the domestic market in the form of monthly statistical bulletins and statistical yearbooks; collect and disseminate cost statistics of member enterprises and undertake of industry cost studies; pass on inquiries from prospective customers to members; advise individual members on transport, on insurance, and on the existence of patents, trademarks and styles on the products of the industry; run status and credit bureaus; provide library services and legal advice; and support members' cases in the Courts when they involve a point of principle deemed to be important to the industry as a whole.

The third area of activity concerns the production efficiency of their members. For example, a trade association could distribute a technical information bulletin which sets out the results of members' research and development in production techniques. Further many trade associations are in contact with the British Standards Institute and have special departments concerned with standards and simplification, and behind them numerous technical committees concerned with different products and processes. In addition, many associations are closely linked with the research agencies of their industries. In some instances they were responsible for starting research groups which have since become research associations jointly financed by industry and government. Finally, many associations prepare and publish estimating and costing manuals on modern methods of costing and endeavor to get members to adopt modern costing and accounting procedures; they are also concerned with the education and training of new workers.

Regulating Market Activities

The third area of trade association activities concerns regulating market activities. The practices used by trade associations are many and varied and include price-fixing, quota systems, resale price maintenance, and other restrictive trade practices such as collective boycott, exclusive dealings, discriminatory rebates, restriction of association membership, restriction of supplies to customers, and aggregate rebate arrangements. Quite often trade associations use a number of the practices together as a way to control both prices and output and thus to regulate market activities. Consequently most trade associations are cartels as opposed to simply price-fixing associations.

Associational price-fixing involves the trade association fixing the market price which its members agree to follow. Generally the trade association establishes a committee to deal with price determination; and the committee in turn employs various methods to fix prices. Some of the costing methods used on which to base the price include determining a weighted average total costs of the three largest enterprises or taking the average total costs of the lowest-cost or of the largest member. Once the cost- base is determined the committee proposes a particular profit mark up and thereby determines the price. The proposed mark up may be a customary one or one that takes into account a number of market factors and policies of the association. After setting the price, the committee may either have the power to impose it on the members of the association or need to have the council approve it. In either case, once the market price has been fixed by the association, its members are in many cases constitutionally bound to accept it.

A quota system involves allocating market sales among the members of the trade association. That is, the trade association determines the amount of market sales by its members for a given base time period and then determines the percentage share of each member. This percentage share or quota for each member enterprise is then monitor closely to see whether it is being exceeded or not. If it is being exceeded then financial penalties will be imposed, perhaps in the form of a pool account which is then used to compensate members who did not reach their quota of sales. For example, under the Hard Fibre Cord and Twine Manufacturers' Association quota scheme, each enterprise was allocated a percentage, based on its pre-war sales, of the total available home trade in packing cord and twine; and the participants were obliged to make payments into a pool or entitled to receive sums from it, according to whether their turnover exceeded their percentage quota or fell below it. From time to time the trade association will alter the quotas, usually basing the new quotas on a new base time period. Quota systems are generally seen as an insurance system against the conditions of cut-throat competition and grabbing of market share.

Resale price maintenance describes a system of marketing whereby the supplier of a product, in practice generally one which is branded or otherwise identified, prescribes as a condition of sale the price at which, or above which, it may be offered for resale by the retail trader together, in some cases, with a similar stipulation as to prices to be charged by wholesalers and in other intermediate transactions in the chain of distribution. In some cases, trade associations encourage or require as a basis of membership member enterprises to establish their own resale price maintenance systems. In other cases, the trade association itself sets up a resale price maintenance system based on the prices its sets. Whether individual or associational-based, their success generally hinges on whether wholesalers and retailers agree to it; and we find that where successful, wholesales and retailers are part of the manufacturers' trade association. In cases where there are violations, either fines will be imposed or the individual enterprise concerned or all the enterprises in the association will boycott it.

The other restrictive trade practices which trade associations employed, such as collective boycott, exclusive dealings, discriminatory rebates, restriction of association membership, restriction of supplies to customers, and aggregate rebate arrangements, were done so as a way to support their price-fixing arrangements, quota systems, and resale price maintenance systems.

Terms

trade association

articles of association

trade union

tort

trade statistics

price-fixing

quota system

resale price maintenance

collective boycott

exclusive dealings

rebates

Exercises and Questions

Readings