The article “The Nature of the Film” authored by Ronald Coase provided an economic overview about the reasons for the individuals to make decisions on the engagement in the business partnerships with other companies as well as business emprises. Rather than conducting bilateral trade via market contracts. Considering that organizational production is achieved without the involvement of any organization, therefore, Coase inquires “Why and under what conditions should we expect firms to emerge?” because the contemporary firms emerge in instances where entrepreneurs start hiring people, the analysis of Coase continues to consider the conditions through which it influence sense for the inventors to seek hired assistance rather than signing contracts for some specific tasks.
The article has presented the traditional time economic theory. According to this theory, since the market is energetically efficient, it is, therefore, cheaper to contract some labor for specific activities instead of hiring. As noted by Coase, there are some substantial cost transactions when applying the market. These costs include goods and services price that is transacted through the marketplace. Other types of financial expenses include research and data cost, the cost of bargaining, trade secrets storage and policing as well as enforcement cost.
Internal firm production can be limited; however, in the article, Coase discovers that minimizing the profit for the entrepreneurial function, it facilitates increased overhead cost. On the other hand, snowballing tendency for an incredulous business director like a manager increases the chances for resource allocation mistakes. Coase argues that the firm size is a product or an outcome of achieving a maximum balance between the competition tendencies of the cost. Therefore, making the firm bigger will come with several advantages; however, decreasing the size of the firm cause’s reduction of returns and ultimately preventing the company from growing.
Coase, R. H. (1937). The nature of the firm. Economica, 4(16), 386-405.