In this essay we present the main developments of the theories of the firm rooted in Ronald Coase’s influential article “The Nature of the Firm”, 1937. In this article he gave valid explanations based in economic theory for two major questions, that are why do firms exist, and why is each firm a certain size? We are going to explore these important topics- of the nature and boundaries of the firm, as well as the internal organization of the firm basing in his theory, which is a transaction- based theory.

Coase in his article, since 1937, [1] points out the need to incorporate transaction costs in the analysis of contractual decisions (Coase [1] later reaffirms this in his paper in what was called the “Coase Theorem” specifying that without transaction costs, institutional choices are not an issue). The first question a theory of the firm should be able to answer is what a firm is. According to Coase (1937), the existence of the firm is due to the existence of transaction costs, and the firm’s boundaries are defined by a simple calculus. The firm stops growing when at the margin, the external transaction costs (the cost of the same transaction executed outside the firm in the market) equal the internal ones.

-The existence of the firm: Ronald Coase offers explanations for why in given markets there is a need for the institutional modality of the firm. His explanations that have been given have one feature: they explain the rationale for the existence of firms in terms of the need to economize on costs, such as transaction costs, agency costs, and supervision and monitoring costs. In this view these explanations assume that a given transaction can be carried out either in a market or in a firm, and that it is only the cost saving that determines where it will in effect be carried out.

The Coase answer to the question of why the firms exist is supported by the suggestion that transaction costs in practical firms are inferior than the costs of production carried out and coordinated through the market. The descriptive focus of this case is on the reduction of costs connected to the transactions involving individuals.