Abstract
As stated in the concluding remarks of chapter 4, the market did not play an important role in the analyses in that chapter. It was in the background and used only to justify that agreements were reached regarding the production of units of products to be carried out during the subsequent production period. The focus was on analyzing what determines the “scopes” of firms.
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Notes
In analyzing the emergence of firms, we have been concentrating on the need to coordinate the varieties of the elementary parts being produced. We should observe however that to carry out this production, indivisible factors of production may be needed (for instance, coordinators, buildings, big machinery, etc.). But because of the indivisibility of the factors (we cannot obtain the exact quantity required) excess capacity of some factors may lead to situations that make it advantageous to use them in the production of more than one block of parts, even in cases where coordination is not required between the blocks. The coordination of the use of an indivisible factor in carrying out the production in two or more blocks of parts may bring those blocks into a firm.
For a discussion of the optimal size of firms, see chapter 6.
To illustrate this point let us use our example of producing automobiles. If one motor division, one chassis division and one body division is sufficient to carry out the necessary production to satisfy the demand, then there is only one way of grouping one motor division, one chassis division, and one body division and, at least under the assumptions of this theory, there is no advantage in disintegrating the firm and using the market. When two integrated firms are sufficient, there are two motor divisions, two chassis divisions and two body divisions and there are (2!)’/2! = 4 possible ways of grouping the divisions. When we have n motor divisions n chassis divisions and n body divisions, there are (n!)’/n! = (n!)2 possible ways of grouping them, a number that grows very rapidly with n.
Similar developments occurred in industries producing matches, flour, breakfast cereals, soup and other canned products, and photographic films where continuous-process technology was adopted (Chandler, 1977, pp 289–299).
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© 1996 Springer Science+Business Media Dordrecht
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Camacho, A. (1996). Variability and the Logic of Firms, Markets, and other Arrangements. In: Division of Labor, Variability, Coordination, and the Theory of Firms and Markets. Theory and Decision Library, vol 22. Springer, Dordrecht. https://doi.org/10.1007/978-94-015-8658-0_6
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