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The Economic Lessons of Fisher Body - General Motors

73 Pages Posted: 14 Oct 2006  

Benjamin Klein

University of California, Los Angeles (UCLA) - Department of Economics; Compass Lexecon

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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

Klein, Benjamin, The Economic Lessons of Fisher Body - General Motors (October 13, 2006). Available at SSRN: https://ssrn.com/abstract=937510 or http://dx.doi.org/10.2139/ssrn.937510

Benjamin Klein (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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Compass Lexecon ( email )

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