theoretical support

    Ronald Coase gave us the first lucid explanation of transaction costs in a 1937 article titled "The Nature of the Firm." His discovery was so important that he was awarded a Nobel Prize over 50 years later.

    Coase concluded that firms are created because the additional cost of organizing them is cheaper than the transaction costs involved when individuals conduct business with each other using the market.

    Firms should conduct internally only those activities that cannot be performed more cheaply in the market or by another firm.

    Thus a firm will expand precisely to the point where "the costs of organizing an extra transaction within the firm becomes equal to the costs of carrying out the same transaction by means of an exchange on the open market."

    Firms will outsource and morph into new configurations and relationships with other firms to lower transaction costs. Those which cling to the industrial models of the past will find hard sledding in the marketplace of the future.