Table of Contents

Handbook on the Economics and Theory of the Firm

Handbook on the Economics and Theory of the Firm

Elgar original reference

Edited by Michael Dietrich and Jackie Krafft

This unique Handbook explores both the economics of the firm and the theory of the firm, two areas which are traditionally treated separately in the literature. On the one hand, the former refers to the structure, organization and boundaries of the firm, while the latter is devoted to the analysis of behaviours and strategies in particular market contexts. The novel concept underpinning this authoritative volume is that these two areas closely interact, and that a framework must be articulated in order to illustrate how linkages can be created.

Chapter 1: The Economics and Theory of the Firm

Michael Dietrich and Jackie Krafft

Subjects: business and management, strategic management, economics and finance, industrial economics, industrial organisation, institutional economics


Michael Dietrich and Jackie Krafft 1.1 INTRODUCTION The title of this handbook makes reference to the economics of the firm and the theory of the firm. The economics of the firm characteristically concerns itself with issues of firm internal structure, organization and boundaries. The theory of the firm analyses behaviour and strategies in particular market contexts. Traditionally within economics these are viewed as separate spheres of analysis. What happens inside the firm has long been studied independently of what composes the details of the competitive environment of the firm and, alternatively, market strategies emerge from a firm conceived as a black box. An early statement of this separation is provided, for example, by Penrose (1959): ‘we shall not be involved in any quarrel with the theory of the “firm” as part of a theory of price and production, so long as it cultivates its own garden and we cultivate ours (ibid., p. 10). And to reinforce the same point: ‘The economist’s “main conceptual schema” is designed for the theory of price determination and resource allocation, and it is unnecessary and inappropriate to try to reconcile this theory with “organization theory”’ (ibid., p. 14). In a similar vein, but from a different tradition, Williamson (1985) suggests that exogenous technologically separable units exist, which are characterized by some degree of asset specificity. Exchange between these units takes place with resulting transaction costs. The minimization of these costs then results in firm organization and more generally institutional development. Without wishing to undermine...

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