Fisher Body Case Study

Acquisition of Fishers Body

Introduction

Benjamin Klein in 1978 revisited the acquisition of fisher Body by General Motors (GM) in 1926 describing it as the most discussed example of economic literature. Fisher Body is a company that produced automotive body parts for GM and other car companies. Their specific products included wooden and closed metal bodies that GM purchased to assemble their cars. The emergence of closed metal car bodies in the 1910s and their being seen as a direction to the future, GM sought to enter into a long-term contract with Fisher Body. The contract specifics were that GM would but car bodies from Fisher body at a fixed price which was set on a cost plus 17.6% basis (where cost was defined exclusive of interest

The notion describes a situation whereby a party in a contract intends to be rational during the signing of the contract, but acts limitedly so afterwards. The said party uses the contract as a means of achieving self-interests and is very opportunistic, seeking a contract that will be of more benefit to it than it will be to the partner. The self-interest-seeking attribute is described in transactional economics as opportunism, moral hazard and agency. In the acquisition of Fisher Body by General Motors, the initial opportunism is seen as the action of Fisher Body, which seeing that the market for closed metal bodies was increasing, sought to enter to a contact with GM, making it long-term. This allowed Fisher Body to invest in expansion of the business as the market becomes less of an uncertainty in the ten years, and the expansion became of more benefit to Fisher Body than it was for GM (Klein, 2008). Although the companies entered into a contract with the intentions to act rationally, Fisher does not do this initially. The company refuses the relocation request. However, with this request refused, GM decides to get opportunistic, they use their higher share of interests in Fisher Body to negotiate for a merger that at last benefit them

This is a core problem in economic organization. In as much as any organization can plan for the future, there are always uncertainties that threaten long-term planning. Uncertainty in transactional economics is of two kinds, primary and secondary. In primary transactional uncertainties, the threat arises from state-contingency. This means that it does not arise from the failure of any of the parties in a transaction to hold their end but on prevailing conditions (Freeland, 2000). Secondary uncertainty, on the other hand, arises directly from communication failure, intentional or unintentional between the parties. This makes one party suffer from the decision of the other. The acquisition of Fisher Body by GM in 1926 saw a combination of the two kinds of uncertainty. First, the changes in demand for metal car bodies that followed the contract were not the making of any of the partners. This is a primary uncertainty that GM failed to consider while entering into a long-term contract. When the returns for Fisher Body increased with investment, operational expansion and market change, the company decided to ensure they bound General Motors to the contract and refused their relocation request. This was a secondary uncertainty that resulted to losses to GM and the decision to negotiate for a