1. The Nature of the Firm Coase, Ronald H
The Nature of the Firm Coase, Ronald H.(1937) Economica, 4 (November):
Yuju Tu
Ronald Coase, 1991 Nobel Laureate, Economics

2. What is a Firm?
Question: “…What are the differences among, factory, firm, and market?”
Factory: Division-of-labor focus, e.g., team production yields more than the sum of individual productions
Market: Price Mechanism focus, e.g., resource allocation through price mechanism
Firm: Entrepreneur coordination focus, e.g., resource allocation by central authority

3. Why Does a Firm Exist?
Question: “…why is there any organization”, i.e., why do firm exist?
Prior economists: Firm exists only because of price mechanism (market). For example, if price factor A becomes higher in X than in Y, A will move from Y to X until the difference disappears.
Ronald Coase: Firm exists because the cost of a central authority organizing transactions internally is cheaper than organizing them externally in the market

4. What Determines the Firm Size?
Question: “Why is not all production carried on by one big firm?”
Ronald Coase: This is because sometimes the cost of organizing the next transaction internally will be greater than the cost of organizing that same transaction in the marketplace.
Question: “For a firm how big is big?”
Ronald Coase: Firm tends to expand until the costs of organizing transactions approach to the costs of carrying same transactions in the market (or, another firm)

5. What Determines the Firm Size?
Question: “Why would the costs of transaction within a firm rise?”
Managerial diseconomy rise;
Larger firms may pay more for resources;
The spatial distribution of the transactions (Physical distance);
Dissimilarity of transactions; and
Rapidly changing environment

6. Conclusions
Ronald Coase: the view of transaction-cost can help explain:
The reason for the existence of a firm
The limit of firm size
The reason why a transaction takes place in a firm, i.e., using the price mechanism (market) to allocate resources is sometimes costly