Question

The decision by General Motors (GM) to purchase Fischer Auto Body, which produced the bodies used for GM cars, is an example of:

A. specialized investment

B. a spot exchange

c. vertical integration

d. joint venture

e. strategic alliance

Answer 1

Ans is Option (c) Vertical Integration

The acquisition which happened showed that to solve hold up problems by using contracts which were inherently imperfect long term contracts, and by this they recognized the advantages of vertical integration.

Here The Fisher Body mainly held up its supply of body to General Motors , So General Motors can renegotiate, contrary to the original understanding between the two companies, and so General Motors then decided half of the investment will be in new body plants. And The acceptance of contract by General Motors was done because they has a long term dealing contract between them, so General Motors did not negotiate with Fisher Body to relocate the Body plants nearer to their Plant.

More than one stage of production which are operated by separate firms is known as vertical Integration.

Other Options are incorrect because it was not a specialized investment because they were not well informed and

also not a spot exchange because General Motors did not regulate or control the Fisher Body.

Also not Joint Venture because it was a division of General motors, when the contract was made

and not a Strategic alliance because the General Motors hold the majority of Fisher companies share which was 60%, so it(Fisher Body) can supply body parts to General Motors.