If Mario's Pizza, a large frozen pizza distributor, builds a tomato sauce plant near Red Tomatoes, a large tomato farm, to reduce the costs of transporting fresh tomatoes, ______potentially faces a hold- up problem as the firm invested in a ______.
A)Red Tomatoes; negotiation asset
B)Red Tomatoes; transaction- specific asset
C)Mario's Pizza; negotiation asset
D)Mario's Pizza; transaction- specific asset

Question

Quizplus · Accepted Answer

The hold-up problem refers to the risk that a specific investment by one party will lead to opportunistic behavior by another party, leading to lower-than-expected returns for the initial investor. In this case, Mario's Pizza is investing in a tomato sauce plant to reduce transportation costs, which is a specific investment tied to the Red Tomatoes farm. This makes it a transaction-specific asset, as opposed to a negotiation asset that would be more general and transferable. Therefore, if Red Tomatoes decides to capitalize on their position and raise prices, Mario's Pizza could potentially face a hold-up problem.

If Mario's Pizza, a Large Frozen Pizza Distributor, Builds a Tomato