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Economics of Organisations - Essay Example

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Economics of Organisations

Victor P. Goldberg (2008, pp. 1071-1084) states that the contract which was entered into between General Motors-Fisher Body (GM/FB) in the year 1919 was lawfully not enforceable.
This realistic proof warranted the chronological significance of the institutional understanding of the economics of the firm founded on the minimization of transaction costs (Tirole,1988; Carlton and Perloff, 1994; Williamson, 1985; Ricketts, 1994).
In a current publication of the Journal of Law and Economics (2000), law of economics of firm has received new explanations. Profounders like (Klein, 2000; Coase, 2000; Freeland, 2000; Casadesus-Masanell and Spulber, 2000;) have proposed that the leading clarification established on issues of sorting of information and transaction costs is an incorrect one. The explanation with regard to taking into account transaction costs, has failed or even neglected many other important causal factors of vertical integration. But according to Kelin (2000), the foremost hypothesis H0 is "holdup is the main rationale for vertical integration".
Klein ( 2000, p 106) states that "the evidence unambiguously demonstrates that while the contract initially worked well, this contract broke down in 1925 when GM's demand for Fisher bodies increased dramatically. Fisher then refused to make the necessary capital investments required to produce bodies efficiently for GM, in particular refusing to build an important body plant close to GM production facility in Flint, Michigan. These contractual difficulties were the primary reason GM decide in 1926 to vertically integrate with Fisher Body"
Whereas Coase (2000, p 15) states that Coase, alternatively, supports the idea that H0 is rejected by historical facts. To him, asset specificity is only a possible foundation for vertical integration which is not sufficiently adequate to validate vertical integration. According to him there are three reasons which stimulate arguments. They are:
a. GM had only acquired 40% of the shares of FB which it had already owned.
b. FB did not locate its plants far away from GM.
c. Fisher Brothers did not use any incompetent methods of production.
Thus it can be said that there was no holdup and thus the H0 was rejected by Coase and he suggested an alternative H1 which is: ""Asset specificity (with or without hold up) is normally handled satisfactorily with long term contracts without requiring vertical integration".
According to Freeland (2000, p 35) vertical integration was "caused primarily by the desire to acquire and retain the specialized knowledge and services of the Fisher brothers". Thus Freeland also declines H0 and places more emphasis on human assets. He states that "Access to specialized human capabilities favours vertical integration which may, in turn, produce holdup situations". The H0 was also rejected by Casadesus-Masanell and Spulber (2000, 68).
Conclusion:
Alternatively, in more current combinings between economics of the firm and business history as in the case General Motor/Fisher Body, the previous difference still applies.
Reference:
1. Crocker and Masten, 1996, "Regulation and administered contracts revisited: lessons from transaction-costs economics for public utility regulation", Journal of
Regulatory Economics, 9, 5-36.
2. Carlton and Perloff, 1994, Modern ...Show more

Summary

GM/FB has positively been one of the most comprehensively talked about historical case on perpendicular amalgamation and the limitations of the firm. Many of the commentators like (Klein, Crawford and Alchian, 1978; Joskow, 1988; Shelanski and Klein, 1995; Crocker and Masten, 1996) took up this particular case as an instance of delay in the existence of asset specificity…
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Economics of Organisations essay example
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