| Cooperation is one of the pillars of markets, because markets are based on exchange. A buyer and seller cooperate to make an exchange. Coase's question was: why don't we see the free market structure that linear algebra predicts? Why do firms exist? His answer was fairly insightful. Markets impose search and transaction costs. To buy something from a market, you must search it for a seller and come to terms. Inside a firm, that search cost may well be zero. Need HR services? Call HR. No need to look for a provider, negotiate a contract and so on. Need IT? Ring the support department. No need to weigh the virtues of IBM vs HP vs the corner store. But sometimes it's the other way around. Need pens? In some companies the process is so onerous that you'll just go to the local store and buy your own. That boundary moves around (consider the impact of IT, for example), but it's always there. If search and transaction costs fall to zero, the firm would in theory become unnecessary. Comparing a market -- or a city -- to a firm is a mistake, because they are different structures emerging from different pressures on the same free agents. |