Denning (2013) states that Coase provided that firms exist
because firms “reduce transaction costs, such as search and
information costs, bargaining costs, keeping trade secrets, and
policing and enforcement costs, thereby increasing the efficiency
of the market economy. Chappelow (2019) adds that the boundaries of
the firms are dictated by property rights. If one firm believes
that another is impinging upon its property rights, Coase (1937)
argues that the involved firms only truly care about the efficient
flow of inputs and outputs involved in the firms’ transactions. In
other words, conflicting firms will reach an agreement “without
regard to issues such as personal sentiment, social equity, or
other non-economic factors” (Chappelow, 2019).
Coase (1937) also provides that there exists a relationship
between a “master and servant” or “employee and employer”. In those
relationships, there is a mutual understanding of goods services
provided on behalf of the servant/employee to the master/employer.
Additionally, the master/employer has control of the inputs and
outputs of the servant/employee. One who is not bound to this
relationship would be the independent contractor, who through a
mutually agreed upon contract that fits within the framework of
what the contractor is willing to do, establishes a contract
determining the goods or services to be provided.
As an aside, Denning (2013) provides an interesting critique
of one of the tenets of Coase’s theorem regarding production and
the lack of organization required. It is hard to imagine that
complex goods such as those in existence today do not require any
organization at all. Denning (2013) also provides that Coase’s
theorem was very relevant to the times but has now fallen short in
explaining the economy of the modern-day times. For instance, the
economy of the 20th century focused on efficiency. The Ford Motor
Company and its initial success is a testament to how important
efficiency was a driver for the success and growth of a firm.