What is the level of transaction specific investment for each firm in the following transactions? Who in these transactions is a greater risk of being taken unfair advantage of?
a. Firm I has built a plant right next door to Firm II. Firm I’s plant is worth $5 million if it supplies Firm II. It is worth $200,000 if it does not supply Firm II. Firm II has three alternative suppliers. If it receives supplies from Firm I, it is worth $10 million. If it does not receive supplies from Firm I, it is worth $9.8 million.
b. Firm A has just purchased a new computer system that is only available from Firm B. Firm A has redesigned its entire production process around this new computer system. The old production process is worth $1 million; the new process is worth $12 million. Firm B has several hundred customers for its new computer system.
c. Firm Alpha, a fast food restaurant company, has a contract with Firm Beta, a movie studio. After negotiating with several other potential partners, Firm Alpha agreed to a contract that requires Firm Alpha to pay Firm Beta $5 million per year for the right to use characters from Firm Beta’s movies in its packaged meals for children. Demand for children’s movies has recently dropped.
d. Firm I owns and runs a printing press. Firm J uses the services of a printing press. Historically, Firm I has sold its services to many customers. However, it was recently approached by Firm J to become its exclusive supplier of printing press services. Currently, Firm I is worth $1 million. If it became the sole supplier to Firm J, it would be worth $8 million. To complete this deal, Firm I would have to stop supplying its current customers and modify its machines to meet Firm J’s needs. No other firm needs the same services as Firm J. Before deciding to propose this arrangement with Firm I, Firm J contacted several other suppliers who said they would be willing to become a sole supplier for Firm J.