Early Business Combinations

The first attempts at combination were two simple devices: (1) “gentlemen’s agreements,” usually used for setting and maintaining prices, and (2) “pooling”—dividing a market and assigning each seller a portion. In pooling, markets could be divided on the basis of output (with each producer free to sell a certain number of units) or territory (with each producer free to sell within his own protected area). Or sellers could form a “profits pool,” whereby net income was paid into a central fund and later divided on a basis of percentage of total sales in a given period. Although pools had been formed even

Before the Civil War, they did not become common until after 1875. During the 1880s and 1890s, strong pooling arrangements were made in a number of important industries: Producers of whiskey, salt, coal, meat products, explosives, steel rails, structural steel, cast-iron pipe, and certain tobacco products achieved great success with pooling agreements, as did the railroads in trunk-line territory. The pool resembled the European cartel. Germany was especially well known for these associations of producers in a particular industry that entered into agreements fixing prices and outputs. The American pool differed from its European counterpart, however, chiefly because in the United States such agreements were illegal (a heritage of English common law) and therefore not enforceable in the courts.

Although gentlemen’s agreements and pooling both worked temporarily, typically they were not durable. If they were successful in raising prices and achieving a “monopoly” profit, they encouraged new firms to enter the field. The temptation to cheat, moreover, was strong. Individual firms could profit by exceeding their assigned outputs and encroaching on another’s territory, and there was no legal recourse against violators.