Capabilities and Coherence in Firms and Markets

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Abstract
There is a tradition in the literature of transaction-cost economics that seeks to explain the existence of firms in terms of the inherent superiority of firms as an organizational form in some circumstances. The problem with these arguments is that they tend to contrast real firms with an idealized -- and extremely narrow -- picture of the market. This paper draws on the evolutionary theory of the firm in economics and the resource-based view of the firm in strategic management in order to elucidate the concepts of firm and market. Its central thesis is that firms do not exist because they are inherently superior to markets (that is, to markets at their best). Rather, firms exist because they are superior to particular markets at particular times and places. The explanation for the existence of firms is thus a historically contingent one in many respects.
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