The ﬁrm as a nexus of contracts will reduce in size along its vertical chain when it can use the market to control its transactions.

Question

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The concept of the firm as a nexus of contracts suggests that firms exist as a way to coordinate economic transactions between individuals, with contracts serving as the basis for these relationships. When the market can be used to facilitate these transactions instead, the firm may reduce in size along its vertical chain. This is in line with the idea that firms exist to help overcome market transaction costs.

The ﬁRm as a Nexus of Contracts Will Reduce in Size