WikiSummary, the Social Science Summary Database

Klein: Fisher-General Motors and the nature of the firm

From WikiSummary, the Free Social Science Summary Database

 
This summary needs formatting (i.e. "wikification"). Can you help us improve it? (Formatting help.) Please volunteer.

Klein. 2000. Fisher-General Motors and the nature of the firm. Journal of Law and Economics 43 (April): 105-42.

A repeat of the Klein et al 1978 article, responding to criticisms by Coase and others.

Y: Vertical integration

X: Asset specificty

Coase argued that vertical integration occurs due to the high cost of negotiating spot contracts (transactions costs).

Klein argues that vertical integration can also occur when assets are specific to the relationship.

Example: GM-Fisher. Fisher and GM made an agreement 80 years ago. Fisher would supply bodies for GM's frames, and GM would buy only from Fisher. GM would pay 17% over non-capital (i.e. non-finance, non-interest) costs. For the first few years, the contract worked well, and Fisher built new plants near GM plants. Around 1924, demand for the kind of bodies Fisher was making exploded, and GM wanted more frames. At this point, Fisher began its holdup of GM (other authors contest that this was not a holdup). The issue was Flint. GM wanted Fisher to relocate its Detroit plant to Flint (60 miles away), but Fisher wanted to expand the Detroit plant instead.

How is this a holdup? GM was required to pay 17% over non-capital cost. It offered to finance the Flint plant, but that would have incurred capital costs (Interest). But by shipping bodies from Detroit to Flint, Fisher incurred a non-capital shipping cost, which it could earn 17% profit on. If GM had gone to the courts, the courts would have upheld the contract and made GM keep paying the 17%. GM solved the issue by buying out Fisher (at above-market price).

Why did the GM-Fisher agreement fail?

  • It could have been self-enforcing. Each side had an opportunity to hold up the other, but each side would incur reputation costs for doing so. The problem was an exogenous shock; the incredible increase in demand in 1924 greatly increased Fisher's incentive to hold up GM, making the contract no long self-enforcing.