opportunism

Jason Strachman Information on this page was acquired from //Managerial Economics and Business Strategy// by Michael R. Baye on pages 211-212.

When a specialized investment must be made to acquire an input, the buyer and seller may attempt to capitalize on the sunk cost of the investment by engaging in **opportunism**. This results in the Hold Up problem. For example, Wheels Inc. makes wheels for airplanes. Boeing is in production of a new airplane that is twice as fast and holds more people than the other models. Boeing's usual wheel supplier ran short on inventory so it calls Wheels Inc. in a panic if it can provide Boeing with the wheels for the new airplane. Wheels Inc. tells Boeing that it can provide the wheels but at double the normal price. In this case the seller is acting opportunistic and holding up Boeing. The buyer doesn't have much choice since Boeing already made a significant investment in the airplane production. This example shows that sellers are encouraged to partake in opportunistic behavior. There are instances when buyers partake in this kind of behavior too. For example, on the flip side -- Boeing's seat manufacturer learns of Boeing's new airplane production and produces 5000 seats in preparation of production. When Boeing is ready for the seats, it calls the manufacturer and says that it needs 5000 seats but that the old pricing is not acceptable any longer and it wants to pay 10% less than before. Boeing is holding up the seat manufacturer -- the manufacturer has already invested in the seats made. If it could sell them to another airplane producer then maybe it would get full money for the seats, but if Boeing is the only company that will buy the seats then the manufacturer may have to accept less money in order not to lose everything invested. __Question 1:__ True or False -- Only sellers can participate in opportunistic behavior? __Question 2:__ Company A needs a wiget for its production process. There are many companies that sell the wigets but each sells it for $100. Company A purchases a sample of wigets from Wigets R Us for $10 to test the quality before making a large purchase. After doing this, Company A calls Wigets R Us to order 1000 wigets. Wigets R Us says that it's new price is $105 per wiget. Has Wigets R Us engaged in opportunistic behavior -- Yes or No? Why or Why not?
 * Answer is False**
 * Answer is Yes. If after paying the $10 which is a sunk cost, Company A wants to buy from Wigets R Us then it must pay $105 for the wiget. If Company A refuses to pay the higher price then it must pay $110 to another company ($10 for the sample + $100) assuming the new manufacturer doesn't engage in opportunistic behavior too and raise its price.**