Inefficiency is caused by the hold-up problem when B is reluctant to make the investment ex ante from the fear that S uses its extra bargaining power to its own advantage.
It is claimed that Fisher Body used the unforeseen situation to hold up GM by increasing the price for the additional parts produced.
[6] During transition out of South African apartheid, many white elites feared that democratization would result in tyranny of the majority.
To ensure a peaceful transition (and to uphold the credibility of the elections), the African National Congress needed to make a commitment to protect the incomes and wealth of the white minority.
[7] This commitment allowed whites to respect the results of a democratic election which would put the majority blacks in power.
That credible commitment from the ANC made the new democratic regime sufficiently attractive to whites in South Africa, otherwise they would not have agreed to transition out of minority rule.
[8] If there are direct externalities, the seller's investment is a hidden action and the buyer has private information about its valuation, the absolutely best solution may not be attained even when the parties have full commitment power.
[9][10] In the absence of direct externalities, simple contracts may solve the hold-up problem even when each party has private information about its valuation.
Thus, this contract does not depend on renegotiation or complicated mechanisms, but its crucial feature is that one of the parties can unilaterally decide whether the trade takes place.
A solution to the hold-up problem is vertical integration such as a merger in which all parts of the body are being produced internally rather than outside.
[19] Vertical integration shifts the ownership of the organizational asset of the firm and therewith creates more flexibility and avoids potential of a hold-up.
However, the ability to write flexible long-term contracts strongly depends upon the underlying market uncertainty and the reputation of the company.