Skip to main content

Fisher Body revisited: Supply contracts and vertical integration

Abstract

The vertical integration of Fisher Body by General Motors has been a leading example in both the transaction-cost theory and the property-rights theory of the firm. The present paper makes the following contributions. First, we show how a simple extension of the property-rights theory of the firm (which allows for contractible trade) is able to rationalize the observed ownership arrangements, supply contracts, and investment behavior both before and after integration. Second, the model lends support to Klein’s (2000) view that an increase in demand for closed automobile bodies was pivotal for vertical integration.

This is a preview of subscription content, access via your institution.

References

  • Besanko, D., Dranove, D. & Shanley, M. (1996). The Economics of Strategy. New York: John Wiley.

    Google Scholar 

  • Bolton, P. & Scharfstein, D. (1998). “Corporate Finance, the Theory of the Firm, and Organizations.” Journal of Economic Perspectives. 12(4), 95–114.

    Google Scholar 

  • Camerer, C. & Malmendier, U. (2005). “Behavioral Economics of Organizations.” In P. Diamond and H. Vartiainen (eds.), Economic Institutions and Behavioral Economics, Princeton: Yrjö Jahnsson Foundation, forthcoming.

  • Carlton, D. & Perloff, J. (1994). Modern Industrial Organization. New York: HarperCollins College Publishers.

    Google Scholar 

  • Casadesus-Masanell, R. & Spulber, D. (2000). “The Fable of Fisher Body.” Journal of Law and Economics 43, 67–104.

    Article  Google Scholar 

  • Chandler, A. & Salsbury, S. (1971). Pierre S. Du Pont and the Making of the Modern Corporation. New York: Harper and Row.

    Google Scholar 

  • Coase, R. (2000). “The Acquisition of Fisher Body by General Motors.” Journal of Law and Economics 43, 15–31.

    Article  Google Scholar 

  • Coase, R. H. (1937). “The Nature of the Firm.” Economica 4, 386–405.

    Article  Google Scholar 

  • Cohen, M., March, J. & Olsen, J. (1972). “A Garbage Can Model of Organizational Choice.” Administrative Science Quarterly. 17(1), 1–25.

    Article  Google Scholar 

  • Crocker, K. & Masten, S. (1996). “Regulation and Administered Contracts Revisited: Lessons from Transaction-Cost Economics for Public Utility Regulation.” Journal of Regulatory Economics. 9, 5–39.

    Article  Google Scholar 

  • Freeland, R. (2000). “Creating Holdup Through Vertical Integration: Fisher Body Revisited.” Journal of Law and Economics. 43, 33–66.

    Article  Google Scholar 

  • Gibbons, R. (2003). “Team Theory, Garbage Cans and Real Organizations: Some History and Prospects of Economic Research on Decision-Making in Organizations.” Industrial and Corporate Change. 12(4), 753–787.

    Article  Google Scholar 

  • Grossman, S. J. & Hart, O. D. (1986). “The Costs and Benefits of Ownership—A Theory of Vertical and Lateral Integration.” Journal of Political Economy. 94(4), 691–719.

    Article  Google Scholar 

  • Hart, O. & Moore, J. (1990). ”Property Rights and the Nature of the Firm.” Journal of Political Economy 98(6), 1119–1158.

    Google Scholar 

  • Hart, O. D. (1995). Firms, Contracts, and Financial Structure. Clarendon Lectures in Economics. New York: Clarendon Press.

  • Holmstrom, B. & Roberts, J. (1998). “The Boundaries of the Firm Revisited.” Journal of Economic Perspectives. 12(4), 73–94.

    Google Scholar 

  • Klein, B. (1988). “Vertical Integration as Organizational Ownership: The Fisher Body-General Motors Relationship Revisited.” Journal of Law, Economics, and Organization. 4(1), 199–213.

    Google Scholar 

  • Klein, B. (1996). “Why Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships.” Economic Inquiry. 34, 444–463.

    Article  Google Scholar 

  • Klein, B. (1998). “Hold-Up Problem.” In P. Newman (ed.), The New Palgrave Dictionary of Economics and the Law. New York: Stockton Press, pp. 241–244.

  • Klein, B. (2000). “Fisher-General Motors and the Nature of the Firm.” Journal of Law and Economics. 43, 105–141.

    Article  Google Scholar 

  • Klein, B., Crawford, R. & Alchian, A. (1978). “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process.” Journal of Law and Economics. 21, 297–326.

    Google Scholar 

  • Milgrom, P. & Roberts, J. (1992). Economics, Organization and Management. Englewood Cliffs, N.J.: Prentice Hall.

    Google Scholar 

  • Rajan, R. & Zingales, L. (1998). “Power in a Theory of the Firm.” Quarterly Journal of Economics. 113(2), 387–432.

    Article  Google Scholar 

  • Ricketts, M. (1994). The Economics of Business Enterprise: An Introduction to Economic Organization and the Theory of the Firm. New York: Harvester Wheatsheaf.

    Google Scholar 

  • Roider, A. (2004). “Asset Ownership and Contractibility of Interaction.” Rand Journal of Economics. 35(4), 787–802.

    Google Scholar 

  • Salanie, B. (1997). The Economics of Contracts. Cambridge, Mass: MIT Press.

    Google Scholar 

  • Segal, I. & Whinston, M. (2000). “Exclusive Contracts and Protection of Investments.” Rand Journal of Economics. 31(4), 603–633.

    Article  Google Scholar 

  • Sloan, A. P. (1964). My Years with General Motors. New York: Doubleday.

    Google Scholar 

  • Tirole, J. (1988). The Theory of Industrial Organization. Cambridge, Mass: MIT Press.

    Google Scholar 

  • Whinston, M. D. (2001). “Assessing the Property-Rights and Transaction-Cost Theories of Firm Scope.” American Economic Review 91(2), 184–188.

    Article  Google Scholar 

  • White, R. (1991). “Body by Fisher: The Closed Car Revolution.” Automobile Quarterly. 29, 46–63.

    Google Scholar 

  • Williamson, O. E. (1975). Markets and Hierarchies: Analysis and Antitrust Implications. New York: Free Press.

    Google Scholar 

  • Williamson, O. E. (1985). The Economic Institutions of Capitalism. New York: Free Press.

    Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Andreas Roider.

Additional information

JEL Classification L22 · L24 · L14 · K12

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Roider, A. Fisher Body revisited: Supply contracts and vertical integration. Eur J Law Econ 22, 181–196 (2006). https://doi.org/10.1007/s10657-006-0310-7

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10657-006-0310-7

Keywords

  • Vertical integration
  • Supply contracts
  • Hold-up
  • Property rights
  • Boundaries of the firm