Organizations, Management Behavior and Economics

Monday, July 03, 2006

Asset Specificity Example

I think the concept of asset specificity is best illustrated with an example similar to the one I gave at the end of section. Imagine you have a buyer and a seller for parts that go into making a car. The specifications for the parts are very specific, so the parts made can only go into one model of car, and only this supplier can make the parts. Now imagine that the buyer and seller enter into a contract where the seller will provide this part at $100 each. After the parts are made, the seller realizes that the parts are critical to the functioning of the car, and it says that, regardless of the contract terms, it's not going to let the parts go for less then $150 each. Now the buyer is in a bind since it can't just turn around and buy them from someone else. The "holdup" could also go the other way, with the buyer saying wait, I'm going to only pay you $75 each, since I know that once these parts are made you can't sell them to anyone else. See the problem? This could theoretically be avoided if the buyer's and seller's assets were contained within the same firm.

9 Comments:

Blogger Safiya Sayani said...

Great help! Love your blog keep it up :)

5:59 AM  
Blogger Safiya Sayani said...

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5:59 AM  
Blogger Safiya Sayani said...

Great help! Love your blog keep it up :)

5:59 AM  
Blogger Safiya Sayani said...

Great help! Love your blog keep it up :)

6:00 AM  
Blogger Kunal Thakur said...

Very well explained !

8:05 AM  
Blogger Danish Sarwar said...

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11:23 AM  
Blogger Danish Sarwar said...

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11:27 AM  
Blogger Danish Sarwar said...

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11:28 AM  
Blogger Danish Sarwar said...

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11:28 AM  

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