Question

1. In your own words, describe what, according to Coase, determines the scale and scope of firms?
2. What impact has the Internet had on the Coasian logic of firm structure as the Internet has become ubiquitous. You may find it helpful to use an example. (helpful hint: perhaps the most obvious example of a novel firm structure starts with the letter "U".)

Answer 1

According to Coase, what determines the scale and scope of firms is the cost,especially the transaction cost. A firm will get bigger until its transaction costs are going lower (economies of scale is part of it). There will be a point where its costs of doing one more transaction will start increasing, and that will be where the company will stop getting bigger. A company might also find that the cost of getting the same transaction done through some other company/person is cheaper. In that case also it will rather create a partnership than do that transaction by itself.

The internet has indeed thrown a spanner in works as far as Coase's theory goes because internet based firms, especially those that work with 'contractors' (the question is hinting at Uber) do not fit into the traditional firm stricture of employees and employers. These firms have very little direct vertical integration and in fact, the firm and the employees are two different entities. It can be said that it is rather like a partnership from Coase's perspective, where the company finds it cheaper to get the work done from the contractors (in Uber's case, the drivers) and the company wouldnt even exist if it could not do that.