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Ronald Coase, who kind of invented the field about "the theory of the firm", asked in his 1937 paper "Nature of the Firm" why companies exists basically.

If you, as Coase did, generally believe that markets are efficient it is not obvious why companies form where the effect of the free market is basically removed inside of the firm. Inside each firm some kind of technocracy/meritocracy rule instead, and resources are not allocated in the same way as outside the firm. If we believe that the free market is the best way to price and allocate a resource (say steel or something), we don't we use the free market to price and allocate resources inside the firm (say workers or machine capacity in a car plant)?

Of course he talks about things that we now consider "transaction cost", it would be a pain in the butt to outsource everything and do nothing "in house". But another reason he talks about is the risk of your subcontractor going out of business.

So to loop back to the question here, if the software is sold to another company which we then buy the services form, we have the risk that the company could fail and we would be without our services.

https://en.wikipedia.org/wiki/Theory_of_the_firm https://en.wikipedia.org/wiki/Transaction_cost http://www.econtalk.org/munger-on-the-nature-of-the-firm/

Thank you

Econtalk I find excellent - a range of guests and a reasonable grilling given even if they are on his (right hand) side of the world.

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