In 1919, General Motors Corporation hired Fisher Body to produce closed metal bo
ID: 445463 • Letter: I
Question
In 1919, General Motors Corporation hired Fisher Body to produce closed metal bodies for their cars. At this time most car bodies were made from wood. The metal body was a novelty, the demand for which and the costs of producing were, to a large extent, unknown.
(a) What types of asset specificity might have developed between GM and Fisher Body as a result of this transaction?
(b) Asset specificity is one condition needed for hold-up to occur. Discuss what else is necessary for hold-up to occur and whether it was likely in this example.
(c) If GM and Fisher Body anticipated possible hold-up problems in this transaction, what types of things might have been in their contract to prevent hold-up?
Explanation / Answer
a.) In the case of General Motor Corporation & Fisher Body, few types of asset specificity occured as a result of this transaction. Williamson has suggested these six main types of asset specificity:-
b.) The most popular example for the consequences of assets specificity has been the relationship between General Motors and Fisher Body between 1919 and 1926. GM's demand for closed-body cars increased to extent that it became unhappy with the contractual price provisions and "urged Fisher to locate its body plants adjacent to GM assembly plants, thereby to realize transportation and inventory economies."
c.) What type of things might have been in their contratc to prevent hold-up -
INFORMATION IMPACTEDNESS (Williamson):"A derivative condition that arises mainly because of uncertainty and opportunism, though bounded rationality is involved as well. It exists when true underlying circumstances relevant to the transaction, or related set of transactions, are known to one or more parties but cannot be costlessly discerned by or displayed for others." Particularly significant when there are sellers, buyers and intermediaries.