The General Motors & Fisher body Case Study
The first paper referring to the case study was written by Benjamin Klein, Robert Crawford, and Arman Alchian, "Vertical integration, appropriable rents and the competitive contracting process." (Klein et al, 1978). It discusses "possibility of post contractual opportunistic behaviour" (Klein et al., 1978 p297) and is a great example of vertical integration used to relieve a hold up in the face of assets specificity, as occurred between GM & Fisher body. The paper has gone on to be considered the “Prevailing view” of the case study, and is supported by other papers.
In 1998, Klein refers again to the Fisher body (FB) - General Motors (GM) Case, ...view middle of the document...
However, favourable conditions arose for FB to take advantage of General Motor, specifically to ask for a monopoly price on the bodies. Consequently the contract aimed to set a price at cost plus 17.6% (Klein et al, 1978). The contract also specified that GM could not be charged higher than the average market price or not more than other car-companies for similar products.
The case then develops interestingly between FB & GM, due to the serious increase in demand for cars (Klein et al, 1978). This led to GM being dissatisfied with the price they were now paying Fisher. The increased price was due to a "substantial increase in body output per unit of capital employed" (Klein et al., 1978 p309). With the lack of capital cost pass-through in the original contract, this was a precarious development. Furthermore, GM required FB to relocate their plants next to GM plants, this they declared was crucial to efficiency in production. This supposedly never happened because of the great investment FB would have to make and In 1924, GM described the contract as unacceptable and started acquiring the remaining 40% of Fishers stock. (Klein et al, 1978). Klein (1988) proposes that explicit human capital with technical proficiency was considerable grounds for GM to vertically integrate with FB.
After revising the original documents, Coase (2000), does not agree that the contract performed well and states that it was changed through complete ownership so as to get the Fisher Brothers more involved in GM. He also highlights the fact that the contract included arrangements for GM to obtain 60% of FB's assets and 3 of the 5 Fisher Brothers' would be chosen by GM for their board. Also in 1921, a member of Fisher finance group of advisors became the director of GM, followed by 2 more in 1924. One became president of Cadillac division of GM (Klein, 2005). A forth Fisher was included in GM's board of directors when FB was fully bought. Coase (2000) considers the 2 firms interests as fairly aligned when the original contract was written and executed, and unlikely that Fisher would behave opportunistically to take away rents from GM. He claims that GM "allowed FB to act opportunistically by locating its plans away from the GM assembly plants, which raised its costs and therefore its profits under the cost plus 17.6% pricing formula." (Coase 2006, p.257).
However, despite common belief, FB did build 8 body plants that were located next to GM plants between 1922 - 1925 and they were inclined to use the most common technology available (Klein 2005). Specifically, GM did not obtain the remaining 40% of FB due to unfavourable contractual relationship and transactions: but instead, "The exclusive dealing contract designed to protect FB's original GM specific capacity investments against a potential hold up by GM created an FB holdup of General Motors" (Klein 2007, p.1). - The case study demonstrates the importance of distinguishing between insufficient hold up...