A takeover of The Coffee Equipment Company by Starbucks explained with “The Nature of
the Firm” by R. H. Coase
In this essay I will evaluate the concept from Coase’s article “The Nature of the Firm” (1937)
in the context of modern real-life situation, and thus will examine to what extent his statements are
relevant in today’s economics.
In his article, Ronald Coase explains why firms exist, how they grow and keep their
efficiency. According to Coase, all the production could be carried on without any organization, with a
functioning price mechanism in place. However, this is inefficient due to the marketing (transaction)
costs, and thus needs a central authority to organize it. A firm exists because it is easier to economize
on marketing costs internally by the integrated force of entrepreneur that directs the resources. Within
the firm, the process of allocation of the factors of production depends on the entrepreneur, and not
the price mechanism. A firm becomes larger when more transactions are organized by the
entrepreneur. However, In the process of firm’s expansion, there will be a trade off - transaction costs
decrease, but the costs of managing these transactions increase. Thus, the extent to which a firm will
grow is determined by the concept of diminishing marginal returns to management - an organization
the Firm” by R. H. Coase
In this essay I will evaluate the concept from Coase’s article “The Nature of the Firm” (1937)
in the context of modern real-life situation, and thus will examine to what extent his statements are
relevant in today’s economics.
In his article, Ronald Coase explains why firms exist, how they grow and keep their
efficiency. According to Coase, all the production could be carried on without any organization, with a
functioning price mechanism in place. However, this is inefficient due to the marketing (transaction)
costs, and thus needs a central authority to organize it. A firm exists because it is easier to economize
on marketing costs internally by the integrated force of entrepreneur that directs the resources. Within
the firm, the process of allocation of the factors of production depends on the entrepreneur, and not
the price mechanism. A firm becomes larger when more transactions are organized by the
entrepreneur. However, In the process of firm’s expansion, there will be a trade off - transaction costs
decrease, but the costs of managing these transactions increase. Thus, the extent to which a firm will
grow is determined by the concept of diminishing marginal returns to management - an organization
