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It's a situation where two parties (such as a supplier and a manufacturer) may be able to work most efficiently by cooperating, but refrain from doing so due to concerns that they may give the other party increased bargaining power, and thereby reduce their own profits.

For example: Imagine a scenario where profit can be made if agents X and Y work together, so they form an agreement to do so, after X buys the necessary equipment. The hold-up problem occurs when X might not be willing to accept that agreement, even though the outcome would be Pareto efficient, because after X buys the necessary equipment, Y would have bargaining power and might decide to demand a larger proportion of the profits than before. The source of Y's power lies in X's investment. Since X is now deeply invested in the project, but Y is not, X stands to lose money, should the deal not be completed, but Y has no such risk. Thus, Y has some bargaining power that did not exist before X's investment. In the extreme, Y could demand 100% of the profits, if X's only alternative is to lose the initial investment entirely.

One way to avoid the hold-up problem is for the firms (X and Y) to merge.

The explanation above is from wikipedia. Is it clear for you?

Def: One who makes a relationship-specific investment is vulnerable to a threat by the other party to terminate that relationship.This threat then permits these parties to obtain better terms than were initially agreed.

ie:

Contract with company to move household goods for a certain price (ex.