What is ‘Asset Specificity’
Asset specificity is the degree to which an asset can have use across multiple situations and purposes. An asset with a high level of specificity has use in only certain situations or for certain purposes. An asset with low specificity has multiple uses and purposes. Asset specificity applies to capital designed to have a single function, or labor trained to perform a single task, and has its limited uses because of some inherent restriction on other possible uses. The more specific an asset, the lower its potential resale value or redeployability. Customized computer software is an example of a highly specific asset. Typically, service sector industries have lower asset specificity while the oil and gas industry, the airline industry and the manufacturing sector have the highest asset specificity. Companies may be reluctant to invest in highly specific assets in a poor or uncertain economy.
BREAKING DOWN ‘Asset Specificity’
Asset specificity applies to capital designed to have a single function, or labor trained to perform a single task, and has its limited uses because of some inherent restriction on other possible uses. Asset specificity might affect the value of an asset’s resale value, or the price assigned to an asset used in a financial transaction. If an asset has a high value to the purchaser because of the asset’s high level of asset specificity and it is needed for a very unique purpose, the asset might command a higher price in that situation than if it were being sold to a different purchaser for another purpose.
There is also an issue when an asset is immobile. It is called “site specificity.” For example, an asset might be located at a particular location and be impossible or prohibitively expensive to move. A manufacturing plant is an example of a highly site specific asset, because it is difficult or impossible to relocate and difficult or impossible to adapt to another use.
Problems with Asset Specificity
Opportunistic pricing can be a potential problem with highly specific assets. If a company relies on a single supplier for one of its parts, that company may try to opportunistically charge the company a very high price for that item. At the same time, the company might try to underpay the supplier knowing that the supplier has no other market for that item. Well-written and well-negotiated contracts can head off this potential problem.