Skip to main content

Minimizing Firm Transaction Cost

Ronald Coase in his landmark 1937 paper The Nature of the Firm believed that all businesses are defined by their transactions. According to his Theory of the Firm people form and establish businesses because they can build and create products cheaper than contracting out the work or doing so on the open market. Firms become a way of reducing transaction costs and improving production capacity.

Firms are tightly bound networks of internal transactions. The size of the firm can be determined by how many transactions exist within the confines of the firm. As firms get large they also become more inefficient because the transaction costs rise making creation more advantageous in other entities.

Transaction costs are associated with 1. Search and information, 2. Bargaining and decision costs, and 3. Policing and enforcement costs.

Firms are at their essence long-term contracts that form when short-term contracts are no longer advantageous. As "Islands of consciousness" the transaction costs within tightly connected firms make them more efficient when compared to outside its walls. As long as it is more advantageous for entrepreneurs to create products and services from inside the firm it will continue to grow.

Coase believed that without understanding transaction costs it is impossible to create sound economic policies. High level overviews of the economy are great but without understanding the inner workings of how information, goods, and services move it is impossible to set policy in a way that improves business fundamentals. Policy often misses the mark because it doesn't integrate into the daily micro actions of the firm.

Consider a policy that helps support a budding industry a nation needs to compete internationally. The policy doesn't consider the lost revenue of inter and intra-firm transactions that make it possible for those firms to compete. It may be more beneficial to develop policies that help firms improve their internal operational transactions and work within clusters to ensure maximum development based on their natural capacities emerges.

I view the internal workings of firms as one tight layer of efficient transactions that rest on industry knowledge. Firms exist together in clusters because they share the same needs for resources and intellectual capital. The stronger and longer the firms exist in a cluster the more efficient the cluster becomes as entrepreneurs seek to modify their environment to create more profits. Hubs are a collection of clusters that share similarities in knowledge and environment whereby advancement in one industry lends to the advancement in another (i.e. telecommunications and Navy). 

Coase, R. (1937) The nature of the firm. Economica, 4 (16).

Fell free to share with appropriate attribution. Dr. Murad Abel http://www.academic-capital.net 

Comments

Popular posts from this blog

The Meaning of A Boundless Moment by Robert Frost

A Boundless Moment by Robert Frost He halted in the wind, and — what was that Far in the maples, pale, but not a ghost? He stood there bringing March against his thought, And yet too ready to believe the most. "Oh, that's the Paradise-in-bloom," I said; And truly it was fair enough for flowers had we but in us to assume in march Such white luxuriance of May for ours. We stood a moment so in a strange world, Myself as one his own pretense deceives; And then I said the truth (and we moved on). A young beech clinging to its last year's leaves. The poem is one of seasons changing and the cycle of life. Each May the bloom comes out and brings life to the death of winter. The poem is about a single moment when the characters see that life has changed. The layers of meaning can be deep but on the surface it appears Robert Frost is discussing nature and its cyclical momentum.   Everything in nature moves through patterns. The poem indicates that

Art Review: The Kiss by Gustav Klimt

The Kiss is Gustav Klimt’s most famous and well known painting. Produced in 1908 in Vienna, Austria and incorporated oil and gold life on the canvas ( 1 ). This was unique for his time and represents both tile works with Asiatic influence. The painting and the romance it brings forward is still wonderment to onlookers. The picture depicts a passionate relationship between a man and woman in a sort of perfect place.  The couple is embracing, bodies entwined, wearing robes of wealth and decadence. It provides linear constructs of the Art Nouveau style and the movement of arts with crafts ( 2 ). The male is square and masculine while the woman painted is in curves to represent femininity. The couple is a pair with the woman and man equal in stature. They are in a field of flowers and appear to rise above it.  To many this painting represents the concept that love has no bounds. Social position or worldly wealth cannot hide what goes on under the fancy clothes and standard m

The Nine Parries of Saber Fencing

The Parry is important for defending against attacks and offers an opportunity to counter attack. Without learning parries it will be difficult to effectively compete in fencing. Your body will be generally open to seasoned fencers. Practicing defending against attacks using multiple parries is important for creating the highest levels of competitive skill. The most common parries used are Parry of Four, Parry of Six, Parry of Seven, and Parry of Eight ( 1 ). They are designed to protect your right side, left side, lower stomach, middle of your stomach. They are parries designed to cover the core areas of your body and help you defend against the majority of fencing attacks.   Prime: Stops a cut to the chest. Seconde: Stops a low cut to the flank Tierce: Stops high cut to the flank Quarte: Stops high cut to the chest. Quinte: Stops cut to head. Sixte : Stops cut to head. Septime: Stops cut to back. Octave: Stops cut to flank. Neuvieme: Protects Back Mic