The Nature of the Circular Firm: A Professional Paper in Economic Theory and Circular Economy
Source: https://www.semanticscholar.org/paper/e18a7c15ef086132222e624fb96828f26b3abc9d ↗
Full text: open-access via OpenAlex ↗
Hyde takes Coase's foundational question — why do firms exist? — and asks it again for the circular economy: when does it make sense for a firm to internalise waste streams rather than externalise them? The paper reframes sustainability not as moral imperative but as organisational design problem, treating waste as property and asking when transaction costs favour building reverse supply chains internally versus buying them from markets.
For product directors this connects environmental constraints to firm boundary decisions: every sustainability initiative is really a make-or-buy decision about waste streams, and the circular firm emerges when coordinating those streams internally becomes cheaper than contracting them out.
The temporal adoption path — entry, hybrid, maturity — provides a practical framework for thinking about sustainability transitions as evolutionary rather than revolutionary organisational change.
Central argument
Hyde argues that circular economy firms cannot be understood through the lens of classical profit-maximization; instead, they are survival-oriented organizations that rationally accept short-run inefficiencies (reverse logistics, redesign, sorting costs) to secure long-run viability. The paper's central thesis is that CE adoption becomes economically coherent only when three conditions align: positive profit during transition, credible learning curves on reintegration costs, and liquid secondary input markets. Rather than relying on traceability mandates or comprehensive regulation, Hyde identifies price-based coordination — enabled by targeted policy levers like differential disposal pricing and property rights in residuals — as the primary scaling mechanism for circular markets.
Critique
The paper's most significant tension is that it builds a microeconomic theory of the circular firm almost entirely from the supply side, while treating demand as a background condition rather than a structural variable. If customer willingness to pay for circular products is itself unstable, heterogeneous, or manipulable by incumbents, then the 'credible NPV' condition Hyde formalizes may be far harder to satisfy in practice than the model suggests — and price signals alone may not be sufficient to close that gap. Additionally, the paper acknowledges that CE's empirical impact on resource extraction has been modest, but attributes this primarily to firm incentives and market structure; it underweights the possibility that the circular model may face fundamental thermodynamic and quality-degradation constraints that no price mechanism fully resolves.
Why it matters for product
Hyde's reframing of firm rationality — from maximization to survival under transitional inefficiency — maps directly onto how CPOs should think about platform or product model transitions: the relevant question is not whether a new architecture or business model is immediately optimal, but whether the organization can remain solvent while costs are temporarily elevated during the shift. His concept of 'integrator firms' as structurally necessary actors where internal coordination is cost-prohibitive offers a concrete lens for decisions about build vs. partner in platform ecosystems, particularly when reverse flows of data, feedback, or reuse need orchestration across organizational boundaries. The identification of minimalist policy fulcrums also parallels product governance design — rather than building comprehensive instrumentation or control systems, the insight is to find the few signal-carrying mechanisms (pricing, access rights, lean standards) that let decentralized actors self-coordinate toward systemic outcomes.