Fisher Body and General Motors


Fisher Body and General Motors[12]

Around 1920 General Motors asked Fisher Body to manufacture closed metal automobile bodies for its cars. Fisher Body needed to make substantial firm-specific investments to comply with General Motors’s request, so to protect itself from being held up, it required General Motors to sign a long-term contract under which General Motors would buy its closed metal automobile bodies only from Fisher Body. If Fisher Body had not entered into such an agreement, then after they made their firm-specific investment, General Motors could have exploited them, because Fisher Body’s investment would have been nearly worthless if they couldn’t sell auto parts to General Motors.

After this exclusive agreement was signed, consumer demand for automobiles with closed metal bodies substantially increased, putting Fisher Body in a very strong position. General Motors now needed far more of these bodies, and by contract it could get them only from Fisher Body. Fisher Body, therefore, had the potential to hold up General Motors.

After demand increased, General Motors made several requests of Fisher Body. They asked them to build a plant closer to General Motors’s production facilities and to reduce their expensive labor costs. Fisher Body refused, however. Since General Motors was locked into Fisher Body, they couldn’t retaliate against this refusal by getting another supplier. Fisher Body had intelligently used contracts to avoid the holdup problem, while General Motors had failed to grasp how its long-term contract would create an artificial monopoly for Fisher Body. General Motors eventually solved its holdup problem by buying Fisher Body.

[12]Facts and analysis based on Klein (1978).




Game Theory at Work(c) How to Use Game Theory to Outthink and Outmaneuver Your Competition
Game Theory at Work(c) How to Use Game Theory to Outthink and Outmaneuver Your Competition
ISBN: N/A
EAN: N/A
Year: 2005
Pages: 260

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