Monday, September 26, 2005

Four pages later...

Coase makes the claim that as costs of communcation and transportation decrease, firm size will increase at the expense of efficiency. That is: the internet is terrible, as is a shrinking world, for it encourages firms to expand too much. Or, perhaps not too much, but it pushes out the point where marginal transactions costs exceed transactions benefits. But he does seem to imply that over-all efficiency is decreased by having larger firms.

The exact quote: "Changes like the telephone and the telegraph [this is 1937, after all] which tend to reduce the cost of organising spatially will tend to increase the size of the firm." Earlier in the paragraph, he writes that
it would appear that the costs of organising and the losses through mistakes will increase with an increase in the spatial distribution of the transactions organised, in the dissimilarity of the transactions, and in the probability of changes in relevant prices. As more transactions are organised by an entrepreneur it would appear that the transactions would tend to be either different in kind or in different places. This furnishes an additional reason why efficiency will tend to decrease as the firm gets larger.

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