In this week’s discussion, you will be asked to review a selection of scenarios and discuss how they may be exemplifying the concept of the post-investment holdup, in addition to other economic concepts, such as sunk and stranded costs. To be prepared to complete this discussion, make sure you have completed your textbook readings, especially Chapter 5.
If you need further information regarding holdup problems, refer to the following:
Holdup Problem, Airline EditionLinks to an external site.
Your instructor may post additional resources to help further explain concepts related to this week’s discussion.
Context
In Chapter 5 of Managerial Economics, Froeb discusses post-investment holdup as a sunk cost problem associated with contract-specific fixed investments. The modern theory of contracts is sometimes called the theory of joining wills, which simply means when parties make an agreement, they are joining together to complete an endeavor of mutual interest. The problem with all contracts that endure over time is that not all potential challenges can be anticipated. The idea of joining wills is that parties will attempt to seek accommodations to advance their mutual interest so long as the return on the invested activity pays off. Froeb illustrates the idea by the example of marriage as a contract.
Instructions
Review the three scenarios below. Look for which, if any, of these scenarios presents an example of post-investment holdup.
Your firm conducted a search for a new chief financial officer and hired a highly qualified candidate with a yearly salary of $250,000. After six months, the person left to join another firm.
Your firm has an exclusive contract to assemble automobile seats for several luxury models. Almost 100% of the materials are imported and, of those, over 50% include parts manufactured in China. All the prices of the parts from China increased by 25% when the United States imposed tariffs on China. Your company has informed all its customers that increased costs must be passed on for your firm to continue supplying the seats. All your customers reluctantly agreed to pay the additional cost.
Your company took note of your progress toward your MBA, and when the director for customer services left the company, you were asked to take over as interim director. You were encouraged to apply for the full-time position once you got your MBA. You served for 13 months, at which time your company was acquired by another company and your position was abolished.
Post a Response
Introduce yourself to your peers by sharing something unique about your background. Explain how you expect this course will help you move forward in your current or future career.
Identify which of the above scenarios, if any, are an example of post-investment holdup.
Choose one of the scenarios above. Define the following and explain each within the context of the chosen scenario:
What is the sunk or stranded cost?
What is the contract?
Was the contract breached?
What is the damage?
