Course Description – The Nature of the Firm Industrial Economics Flavio Pinto

Rules s’ List Write an to Subject: New member Industrial Economics Strict deadline: Class Attendance is not compulsory Exam (2 Hours) Material allowed: 1 Folder: Copied material used during the course (COPYLADEN) 1 Notebook: strictly personal (No copies are accepted) 1 Folder: Slides Colors, Rule, Calculator, Dictionary NOT Specially NOT Allowed: Classmate’s printed copies Rules

Firms’ Organization Why firms exist? Why they have different sizes? What determines the firm’s size? Why firms sign contracts? What is the relationship between firms and markets? Do firms’ size and organization influence markets? Do markets influence firm size and organization? The Questions of the Course

Market Structures Why firms of different markets organize differently? What is the relationship between firms and markets? Do firms’ size and organization influence markets? Do markets influence firm size and organization? How market structures affect social welfare? The Questions of the Course

Firms and Consumers: Strategies What is the rationale behind offers? e.g. pay two take three 5 units for 3€, 10 units for 4,50€ “This book is not for sale in USA and Canada” The Questions of the Course

Approaches to the Study of Industrial Economics Structure-Conduct- Performance The Microeconomic Approach Competition Approaches to Industrial Economics

The Nature of the Firm How productive resources are allocated? The Price as coordinating mechanism Unconscious  Society as Organism (not as organization) Counterexample … Entrepreneurs coordinate Organizations Cooperation Coordination Planning Nature of the Firm

Why Organizations are necessary? In principle, the production could be coordinated by the price mechanism… For Coase, firms exist for superseding the price mechanism  Entrepreneurial coordination replaces market price coordination Why then, one mechanism is selected? Nature of the Firm

Why Organizations are necessary? If other mechanism is better for the direction of resources e.g. some actors like to be directed e.g. some actors like to direct More realistic: costs of using the market mechanism Costs of discovering relevant prices Costs of negotiating and concluding contracts contracts Costs of negotiating several contracts right Contracts are for having the right to use a factor, within certain limits Nature of the Firm

Firm’s Size Law of Diminishing Returns Integration: Integration: The costs of organizing additional transactions within the firm Disintegration: Disintegration: There must be a point at which the costs of organizing a transaction equal the market price of the transaction Organized transactions fail to allocate the factors efficiently There must be a point at which the loss of the inefficient allocation equals the costs of the transaction at the open market Nature of the Firm

Firm’s Size A firm will tend to be larger: As the marginal costs are below the average costs The less the costs of organizing transactions (Coase) The less likely the entrepreneur is to loose control with more organized transactions Nature of the Firm

Firm’s Structure and Property Rights “Ownership” and Property Rights Resources are no properties Rights to use resources Questions (rights and restrictions on rights): What are the rights? Who has the right? Structures of Governance (Contracts) Property Rights