Fisher-General Motors and the nature of the firm

After working well for more than 5 years, the Fisher Body-General Motors (G M) contract for the supply of automobile bodies broke down when GM's demand for Fisher's bodies unexpectedly increased dramatically. This pushed the i mperfect contractual arrangement between the parties outside the self-enfor cing range and led Fisher to take advantage of the fact that GM was contrac tually obligated to purchase bodies on a cost-plus basis. Fisher increased its short-term profit by failing to make the investments required by GM in a plant located near GM production facilities in Flint, Michigan. Vertical integration, with an associated side payment from GM to Fisher, was the way in which this contractual hold-up problem was solved. This examination of the Fisher-GM case illustrates the role of vertical integration in avoiding the rigidity costs of long-term contracts.