The Nature of the Firm (Coase 1937)

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The Nature of the Firm (Coase 1937)

• Prepared by
• Enrique, Lihong, John, Jongkuk

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Motivation Purpose

• To show a definition of the firm with realistic
  and manageable assumptions
• To bridge a gap between the assumptions about two
  resource allocation mechanisms in economic theory

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Main Assumptions

• Mechanism for resource allocation outside the
  firm differs from that within the firm
• Firm is featured by the suppression of the price
  mechanism by the entrepreneur coordination

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Main Inquiries

• What is the basis on which the choice between the
  two alternative mechanisms is made?
• More broad questions
• Why do firms exist?
• Why do markets exist?
• What determines the size of the firm?
• What constitutes a firm?

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Main Arguments (1)

• Cost of using price mechanism
• Price discovering
• Contract negotiation
• Uncertainty of a series of contracts
• Cost saving by using authority coordination
• Transfer pricing
• Great reduction of contracts
• Feasibility of long-term contracts

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Main Arguments (2)

• Cost of using organizing/Constraints on firm
  size
• Decreasing returns to the entrepreneur function
• Efficiency loss of resource allocation
• Rising supply price of some production factors
• Some other influences on firm size
• Relative costs of organizing by two firms
• Advancements of communication and managerial
  technology

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Theoretical Contributions(1)

• Transaction Costs Theory
• The operation of a market costs something and
  by forming an organization and allowing some
  authority to direct the resources, certain
  marketing costs are saved
• Property Rights Theory
• The essence of the contract is that it should
  only state the limits to the powers of the
  entrepreneur. Within these limits, he can
  therefore direct the other factors of production

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Theoretical Contributions(2)

• Agency Theory
• A firm, therefore, consists of the system of
  relationships which comes into existence when the
  direction of resources is dependent on an
  entrepreneur
• Arguments related to Firm Growth
• the actual point where the expansion of the
  firm ceases might be determined by a combination
  of the factors like the diminishing returns to
  management
• Arguments related to Behavioral Theory
• the service which is being provided is
  expressed in general terms, the exact details
  being left until a later date