The Economic Lessons of Fisher Body - General Motors
73 Pages Posted: 14 Oct 2006
There are 2 versions of this paper
The Economic Lessons of Fisher Body - General Motors
The Economic Lessons of Fisher Body-General Motors
Date Written: October 13, 2006
Abstract
The costs of using rigid, inherently imperfect, long-term contracts to solve potential holdup problems, and the corresponding flexibility advantages of vertical integration, are illustrated by the Fisher Body-General Motors case. The holdup of General Motors by Fisher Body is shown to have involved Fisher renegotiating its body supply contract with G.M. so that, contrary to the original understanding, G.M. made half of the required investments in new body plants. Under the unchanged cost-plus contract terms designed to provide Fisher with a return on its equity capital investments, the decline in Fisher Body's capital to sales ratio led to a substantial wealth transfer from G.M. to Fisher. G.M. was forced to accept this unfavorable contract adjustment because it desired co located body plants and was operating under a long-term exclusive dealing arrangement designed to protect Fisher Body's original G.M.-specific capacity investments. The contract adjustment demonstrates the importance of distinguishing between inefficient threatened holdup behavior and the efficient way it is in both transactors' interests to actually accomplish a holdup. Contrary to Ronald Coase's recent criticism, this analysis reconciles all the available evidence.
Keywords: holdups, vertical integration, exclusive dealing
JEL Classification: L22
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Contracts as Reference Points - Experimental Evidence
By Ernst Fehr, Oliver Hart, ...
-
Contracts as Reference Points: Experimental Evidence
By Ernst Fehr, Oliver Hart, ...
-
Contracts as Reference Points - Experimental Evidence
By Ernst Fehr, Oliver Hart, ...
-
By Oliver Hart and John Moore
-
By Oliver Hart and John Moore
-
By Oliver Hart and John Moore
-
Shifting the Blame: On Delegation and Responsibility
By Björn Bartling and Urs Fischbacher
-
Agreeing Now to Agree Later: Contracts that Rule Out But Do Not Rule in
By Oliver Hart and John Moore
-
Agreeing Now to Agree Later: Contracts that Rule Out But Do Not Rule in
By Oliver Hart and John Moore