1. Coase 1937 The Nature of the Firm Ronald Harry Coase 1910~2013
UIUC BA545_Fall 2019
The Nature of the Firm
Coase 1937
Ronald Harry Coase
1910~2013
Professor Joseph T. Mahoney
Presented by: Fang-Yi Lo

2. Main Ideas 01 · Why do firms exists ?
02 · What determines the size of the firm?
Use transaction cost concept to explain phenomena

3. Background and Assumptions
Motivation & Gap 01
Economics assumed price system works itself, in real world, it is NOT the case!
Def. of a firm: manageable (tractable) & realistic (real world)
To bridge a gap between the assumptions about two resource allocation mechanisms in economic theory
Background and Assumptions
Gap
Price Mechanisms
Entrepreneur

4. Answer of why Firms Exist:02
Supersession of the price mechanism
Firm is featured by the supersession of the price mechanism by the entrepreneur coordination
Allocation of resources
Mechanism for resource allocation outside the firm differs from that within the firm
Why do firms exists ?

5. Why firms not just pricing mechanisms?
Cost of market 03
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
Why do firms exists ?
Why firms not just pricing mechanisms?

6. Why firms get larger or smaller?04
Additional transaction are organized by entrepreneur
Entrepreneur abandons the organzaition of transactions
The size of the firm
Why firms get larger or smaller?

7. Cost of large firm 05 The size of the firm
Cost of using organizing/Constraints on firm size:
Decreasing returns to the entrepreneur function
Cost of organising > marketing cost (transaction cost)
Efficiency loss of resource allocation
Waste of resources > marketing cost (transaction cost)
Rising supply price of some production factors
Other advantage of small firms
The size of the firm
Why not just one big firm?

8. A (take over all the process?)
Some other influences on firm size: 06
Relative costs of organizing by two firms (AB)
A’s cost will higher, so, only when A’s cost of organizing < B’s cost (transaction cost)
Advancements of communication and managerial technology
A (buyer)
B (seller)
The size of the firm
A (take over all the process?)

9. Entrepreneur efficient07
Cost of Organizing
• the less the costs of organising and the slower these costs rise with an increase in the number of transactions organised
Entrepreneur efficient
• the less likely the entrepreneur is to make mistakes and the smaller the increase in mistakes with an increase in the transactions organised
Cheaper factor
• the greater the lowering (or the smaller the rise) in the supply price of factors of production to firms of larger size
the size of the firm
Other things being equal, therefore, a firm will tend to be larger

10. 08 Summary 01 Transaction cost decision: Mechanisms of market or firm
01 · Why do firms exists ?
Market
Firm
Vs.
Costs involved in leaving the transaction by the price mechanism (spot market)
Costs of organizing within the firm
Costs of organizing in another firm

11. 02 · What determines the size of the firm?
Summary 02 09
Transaction cost decision: The size of the firm
Consider the marketing costs (the cost of using price mechanism), and the cost of organising of different entrepreneurs and then determine how many products will be produced by each firm
Cost of organizing within the firm and on marketing cost explain why firms get larger and smaller
Summary 02
02 · What determines the size of the firm?