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# The Nature of the Firm

## Details

**Authors** Coase, R. H.

**Year** 1937

**Publisher** Economica

**Kind of work** article

**Discipline** Economics

**Applied** false

[Read it at the publisher](https://doi.org/10.1111/j.1468-0335.1937.tb00002.x) 
10.1111/j.1468-0335.1937.tb00002.x

## In authors' words

### What they set out to do (purpose)

To explain why firms exist in an economy that is otherwise coordinated by the price mechanism, and to determine what fixes the size of a firm.

### How they did it (methods)

Theoretical argument in economics.

### What they found (results)

Coase argues that using the market carries costs beyond the price of goods, including costs of discovering prices, bargaining, and drafting and enforcing contracts, and that firms arise where organizing activity internally avoids these costs. He argues that the size of a firm is limited by decreasing returns to the entrepreneurial function, since managing additional activity internally eventually costs more. The boundary between firm and market lies where the cost of organizing one more transaction within the firm equals the cost of carrying it out through the market. The analysis is confined to contractual relations.

## Commentary

### In short

The essay is a theory of where a boundary falls between the inside and the outside of an organization. It treats the firm as a whole whose extent is set by the balance of two opposing costs, with the market as the contrasting mode of coordination. This is a distinction-and-system analysis of economic organization.

**Patterns it shows** D, S

**Added** 2026-10-10

**How to cite this** Coase, R. H. (1937). The Nature of the Firm. Economica.