The Nature of the Firm

The founding question: if the market is so efficient, why do firms exist? Coase answers that organising activities in the open market has costs — searching for suppliers, negotiating contracts, monitoring quality. Firms exist because internalising those activities is cheaper than contracting them out. The optimal size of a firm is set by a frontier: you grow until the cost of coordinating internally exceeds the cost of going to the market. Every technology that lowers coordination costs moves that frontier.