Participantes en la situación comunicativa

42 Ibid, 679.

43 A Tor and WJ Rinner, ‘Behavioral Antitrust: A New Approach to the Rule of Reason after Leegin’ [2011]

2011 U Ill L Rev 805.

44 Ibid, 829.

45 Ibid, 822-829 and 830.

46 Ibid, 833-834.

47 R Van den Bergh, ‘Behavioral Antitrust: Not Ready for the Main Stage’ [2013] 9 J Comp L & Econ 203, 220-221.

68 2.2.1. Neoclassical Theory

Under the neoclassical theory, the firm was viewed as a profit-maximising production unit operating on the free market or under state regulation.⁴⁸ Neoclassical economists focus on the price system rather than on the nature of the firm as a distinct economic entity.⁴⁹ In this framework, a firm maximises its profits when its marginal revenue, namely the additional revenue obtained for every additional unit of output produced, equals its marginal cost, in other words the additional cost incurred for the production of one additional unit of output (MR=MC). This theory recognises three main reasons for the existence of the firm: a) relatively large number of specialised employees;

b) wider use of capital goods; and c) economies of scale.⁵⁰

Nevertheless, the neoclassical theory does not explore the internal organisation of production within a firm; it rather approaches the firm as a ‘black box’, the size and boundaries whereof are more or less obscure. Accordingly, it does not attempt to explain why firms merge, or why one firm decides to split itself into two smaller firms. Similarly, it does not take into account the conflicting interests between employers and employees.

Despite its shortcomings, the neoclassical theory has survived for well over one hundred years.⁵¹

2.2.2. Coasian Theory

In his 1937 article ‘The Nature of the Firm’,⁵² Ronald Coase suggested a different approach to the concept of the firm, through the introduction of the principles of

48 See R Flannigan, ‘The Economic Structure of the Firm’ [1995] 33 Osgoode Hall LJ 105, 110, and O Hart,

‘An Economist’s Perspective on the Theory of the Firm’ [1989] 89 Colum L Rev 1757, 1758. For a summary of the neoclassical theory, see also L De Alessi, ‘Property Rights, Transaction Costs, and X-Efficiency: An Essay in Economic Theory’ [1983] 73 Am Econ Rev 64.

49 This conception culminated in the model of perfect competition, but, according to Demsetz, ‘[w]hat parades as perfect competition has much to say about the price system, but little to say about competition or the organization of firms’. The implication of this theory, Demsetz points out, does not refer to competition but to decentralisation, as opposed to the centralised control of economy. In this sense, each actor maximises its profits irrespective of the others’ conduct, see H Demsetz, ‘The Theory of the Firm Revisited’ [1988] 4 JL Econ & Org 141, 142. Accordingly, a neoclassical market is a market in which a single buyer and a single seller can conclude an individual transaction which does not affect any third parties. Transactions in such a market are Pareto optimal, ie there is no alternative option that can make someone better off without making someone else worse off, see H Hovenkamp, ‘Bargaining in Coasian Markets: Servitudes and Alternative Land Use Controls’ [2001-2001] 27 J Corp L 519, 520.

50 TS Ulen, ‘The Coasean Firm in Law and Economics’ [1992-1993] 18 J Corp L 301, 305.

51 For the reasons of the neoclassical theory’s survival, see ibid, 306.

52 RH Coase, ‘The Nature of the Firm’ [1937] 4 Economica 386.

69 transaction cost economics.⁵³ The importance of this seminal paper lies, in particular, in the fact that ‘it offered an entirely different way of looking at the reasons for the existence of the firm as an economic entity, and for explaining the scope of what the firm does’.⁵⁴ Coase drew a clear distinction between the market and the firm, and regarded them as alternative methods of coordinating production.⁵⁵ According to Coase, firms emerge because the use of the price mechanism (namely the market)⁵⁶ is costly. More specifically, he identified three types of relevant marketing costs: a) cost for the discovery of the relevant prices, b) costs related to the negotiation and conclusion of transactions, and c) cost of concluding a long-term contract where it is difficult for the ‘factor of production’ to foresee the course of conduct that the other contracting party will follow in the future; thus, the respective costs raise because of the entrepreneur’s need to provide for the various contingencies that are likely to emerge during the term of the contract, in which case information and bargaining costs have to be incurred repeatedly.⁵⁷

Coase suggested that firms come into existence specifically in order for the aforementioned marketing costs to be saved: it is the internalisation of production in the context of a firm⁵⁸ that minimises the costs that would otherwise be required for the use of the market. In particular, the direction of resources by an authority, in other words the power relationship within a firm, is regarded as a substitute for the price mechanism, which is superseded.⁵⁹ Thus, instead of a certain number of contracts that would have to be concluded on the market, the factor of production will have to enter into only one, establishing a relationship of hierarchical control, and setting limits to the power of the

53 Note that one of the basic assumptions of the neoclassical theory is that transaction costs are zero, see L De Alessi, supra n 48, 65.

54 TS Ulen, supra n 50, 307. However, note the substantial similarities between Coase’s work and the earlier work of Pigou with regard to transaction cost economics, as highlighted in H Hovenkamp, ‘The Coase Theorem and Arthur Cecil Pigou’ [2009] 51 Ariz L Rev 633, 636-640.

55 RH Coase, supra n 52, 388 (‘Outside the firm, price movements direct production, which is co-ordinated through a series of exchange transactions on the market. Within a firm, these market transactions are eliminated and in place of the complicated market structure with exchange transactions is substituted the entrepreneur-co-ordinator, who directs production’).

56 In the words of Flannigan, ‘[t]he price mechanism or market terminology is only shorthand for the process of exchange or negotiation where persons do the work of buying and selling (the allocation or coordination of resources)’; R Flannigan, supra n 48, 113.

57 RH Coase, supra n 52, 390-392. See also the criticism in R Flannigan, supra n 48, 115-116.

58 Citing Robertson, Coase regards firms as ‘islands of conscious power in this ocean of unconscious co-operation’, RH Coase, supra n 52, 388.

59 Ibid, 392.

70 entrepreneur.⁶⁰ Put differently, the organisation of a firm is similar to the relationship between employer and employee.⁶¹

Apart from identifying the reasons for the emergence of firms, Coase’s work has one additional implication: it suggested that the costs of bargaining may simultaneously explain the firm’s size. Obviously, the more the transactions conducted within a firm, the larger that firm is. However, given that internal organisation is also costly⁶², the firm will expand until the point where the costs of in-house transactions equal the costs of doing business on the open market. The definition of the boundaries of the firm is a major contribution of Coase’s insight, since the issue had not been addressed previously by the neoclassical paradigm.⁶³

Thirty-five years after the publication of ‘The Nature of the Firm’, Professors Alchian and Demsetz⁶⁴ challenged Coase’s understanding of the firm as an entity completely distinct from the framework in which it operates. In fact, they considered the firm as having ‘no power of fiat, no authority, no disciplinary action any different in the slightest degree from ordinary market contracting between any two people’.⁶⁵ Alchian and Demsetz compare the relationship between an employer and an employee to that between a grocer and his customer. The relationship between two independent contractors, such as the latter, is based not on a formal contract, but on the continuous repetition of similar transactions, nevertheless it cannot be claimed that the grocer is the customer’s employee.

Giving a specific order to an employee is, according to Alchian and Demsetz, in no way different from telling a grocer to sell one or the other good. In both cases, the sanctions for the employee or the grocer’s failure to comply with the obligations that derive from the respective agreements are identical: they will be either fired or sued. The grocer, in particular, will be ‘fired’ in the sense that the customer will start shopping from another grocer.⁶⁶

60 In fact, according to Coase, the limitation of the powers of the entrepreneur is the only purpose of such a contract; see ibid, 391.

61 Ibid, 404.

62 The costs of entrepreneurial control relate to: a) increasing costs of organising additional transactions within the firm; b) increased likelihood of error resulting to a waste of resources; and c) rising supply price as the firm expands its boundaries; RH Coase, supra n 52, 394-395.

63 See O Hart, supra n 48, 1758. Ulen points out that ‘[t]his second implication of the theory in The Nature of the Firm is so obviously correct that it has become a staple part of the economic literature’; TS Ulen, supra n 50, 308.

64 AA Alchian and H Demsetz, ‘Production, Information Costs, and Economic Organization’ [1972] 62 Am Econ Rev 777.

65 Ibid, 777.

66 Ibid.

71 Thus, after having concluded that ‘[l]ong-term contracts between employer and employee are not the essence of the organization we call a firm’,⁶⁷ Alchian and Demsetz pointed out that internal organisation has instead been developed as a solution to the problem of shirking: given that the firm involves a team productive process, careful monitoring of each team member’s performance is essential for the enhancement of productivity. However, since monitoring is itself costly, and since individualised market competition cannot exercise sufficient control, individual team members have the incentive to relax and shirk.⁶⁸ The appointment of a specialised monitor is, therefore, required. In order for the monitor to perform his tasks efficiently and not shirk himself, he will be granted residual claimant status. The rights assigned to the monitor also include the power to alter team membership, to renegotiate the terms of any contract individually, and to sell those rights, and they define the essence of the firm as ‘a contractual structure subject to continuous renegotiation with the central agent’,⁶⁹ as well as the monitor’s role as the firm’s owner.⁷⁰

2.2.3. The ‘Nexus-of-Contracts’ Theory

The Alchian-Demsetz understanding of the firm as a structure both the internal and external relationships whereof are governed by contract was subsequently carried further by the ‘nexus-of-contracts’ theory on the nature of the firm, which drew a distinction between ownership and control. The nexus-of-contracts theory was initially formulated by Professors Jensen and Meckling,⁷¹ who objected to the emphasis placed by Alchian and Demsetz on the concept of team production; in their view,

[c]ontractual relations are the essence of the firm, not only with employees but with suppliers, customers, creditors, etc… [since the] private organization or firm is simply one form of legal fiction which serves as a nexus for contracting relationships and which is also characterized by the existence of divisible residual

67 Ibid.

68 Ibid, 778-781. Shirking results in higher agency costs, the concept whereof refers to ‘the inevitable risks that agents will act for themselves rather than their principals’; see EW Orts, ‘Shirking and Sharking: A Legal Theory of the Firm’ [1997-1998] 16 Yale L & Pol’y Rev 265, 275. The financial loss incurred by the principal as a result of the agent’s opportunistic behaviour is termed ‘residual loss’, see also MC Jensen and WH Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’ [1976] 3 J Fin Econ 305, 308.

69 AA Alchian and H Demsetz, supra n 64, 794. See also H Demsetz, supra n 49, 151-154, and H Demsetz,

‘The Structure of Ownership and the Theory of the Firm’ [1983] 26 JL & Econ 375.

70 AA Alchian and H Demsetz, supra n 64, 783 and 794.

71 MC Jensen and WH Meckling, supra n 68.

72 claims on the assets and cash flows of the organization which can generally be sold without permission of the other contracting individuals.⁷²

The basic implication of Jensen and Meckling’s insight is, therefore, that there is no actual distinction between the transactions carried out within a firm and those concluded on the market; instead, all these transactions form a single ‘continuum of types of contractual relations’.⁷³ By contrast to Coase’s theory, the nexus-of-contracts conception does not recognise management hierarchy as a significant feature of the notion of the firm.

Subsequently, Eisenberg approached the nexus-of-contracts conception as meaning that

‘the corporation is a nexus of reciprocal arrangements made within a framework of mandatory legal rules, just as many other reciprocal arrangements, like contracts, trusts, and marriages, are made within a framework of mandatory legal rules’.⁷⁴ This theory has proved to be very influential, but has, at the same time, been subject to fierce criticism, mainly due to its inability to explain the firm’s size; in essence, its implication that contractual continuity frustrates the definition of the firm’s boundaries is in contrast with the general perception of the firm’s structure.⁷⁵

2.2.4. The Transaction Cost Argument

The significance of transaction cost savings (first suggested by Coase) was further elaborated by Oliver Williamson.⁷⁶ By contrast to the neoclassical theory, Williamson

72 Ibid, 310-311 (emphasis in original). Two other prominent proponents of the nexus-of-contract theory are Judge Easterbrook and Professor Fischel. They contend that

[a] series of short-term dealings in a market may be more useful for trading than for producing goods, however. The firm – an aggregation of people banded together for a longer period – permits greater use of specialization. People can organize as teams with the functions of each member identified, so that each member’s specialization makes the team as a whole more productive than it would otherwise be;

FH Easterbrook and DR Fischel, The Economic Structure of Corporate Law (Harvard University Press 1996), p 8. Reflecting the Coasian theory, they also argue that the firm will expand until the costs of internal organisation of production – agency costs being a substantial part whereof – equal the costs of organising through market transactions; ibid, pp 8-9.

73 See O Hart, supra n 48, 1764. Besides, in the context of this conception, the firm has also been defined as

‘the nexus of contracts, written and unwritten, among owners of factors of production and customers’, see EF Fama and MC Jensen, ‘Separation of Ownership and Control’ [1983] 26 JL & Econ 301, 302.

74 MA Eisenberg, ‘The Conception that the Corporation is a Nexus of Contracts, and the Dual Nature of the Firm’ [1998-1999] 24 J Corp L 819, 823-824.

75 See, eg, R Flannigan, supra n 48, 120-121; O Hart, supra n 48, 1764-1765.

76 According to Williamson himself, the theoretical gap between transaction cost economics and the contractarian theory presented in the previous subsection should not be overstated, since ‘[t]ransaction economics adopts a contractual approach to the study of economic organization’; OE Williamson, Economic Organization: Firms, Markets and Policy Control (New York University Press 1986), p 174.

73 regards the firm as a ‘governance structure’⁷⁷ and not a production function. Accordingly, account should be taken of the firm’s organisational features, in order for its boundaries to be defined.⁷⁸ Williamson further assumes that there are two behavioural factors⁷⁹ which urge a firm to select internal organisation over market transactions. The first is bounded rationality, namely the fact that individuals are ‘intendedly rational, but only limited so’;⁸⁰ the actors’ bounded rationality makes the drafting of complete contracts impossible.⁸¹ Thus, the main advantage of the centralisation of information in the form of hierarchical control is that the collection of information as well as the decision-making process will be assigned to ‘one or few individuals who have superior information processing capabilities and exceptional oratorical and decision-making skills’.⁸² This will in turn result in both considerable cost savings and in the increased likelihood that the correct decision will be reached by the central coordinator.

The second behavioural assumption on which transaction cost economics places great emphasis is related to the concept of opportunism. Williamson defines opportunism as the ‘deep condition of self-interest seeking that contemplates guile’.⁸³ Parties to a transaction may act opportunistically either ex ante, through the asymmetrical disclosure of information during the negotiations for the conclusion of an agreement, or ex post, during the execution or renewal of the contract.⁸⁴ Williamson, therefore, suggests that internal organisation can result in more effective productivity evaluations, as well as in a more sophisticated conflict resolution mechanism, since the firm has the ability to settle any internal conflicts without recourse to fiat (as opposed to intra-organisational settlements).

The importance of this mechanism lies in the fact that it keeps the conduct of the various divisions of the corporate entity under control and, at the same time, sets the standards for

77 Orts points out that ‘[b]y “governance structure”, [Williamson] means one version or another of an explicit or implicit contract’; EW Orts, supra n 68, 290. The author also criticises Williamson’s insight for failing to exhibit a comprehensive understanding of the underlying legal principles.

78 Neoclassical economists, on the other hand, took the firm’s boundaries for granted, as determined by the

‘technological economies of scale and scope’; see OE Williamson, ‘Economics and Organization: A Primer’

[1996] 38 Cal Mgmt Rev 131, 131-133.

79 See OE Williamson, ‘The Logic of Economic Organization’ [1988] 4 JL Econ & Organ 65, 67-69.

80 OE Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (The Free Press 1985), p 30, quoting Herbert A Simon (emphasis in original).

81 R Flannigan, supra n 48, 122.

82 OE Williamson, Markets and Hierarchies: Analysis and Antitrust Implications (The Free Press 1975), p 52.

83 OE Williamson, supra n 79, 68. An alternative definition provided by Williamson is that ‘[o]pportunism is an effort to realize individual gains through a lack of candor or honesty in transactions’; OE Williamson,

‘Markets and Hierarchies: Some Elementary Considerations’ [1973] 63 Am Econ Rev 316, 317.

84 OE Williamson, ‘Markets and Hierarchies: Some Elementary Considerations’, supra n 83, 317.

74 admission to the integrated firm. In that way, both ex post and ex ante opportunistic behaviour is prevented.⁸⁵

2.2.5. The Property Rights Argument

An alternative theory suggested by Oliver Hart⁸⁶ is that the firm should be regarded as a set of property rights or, put differently, of the assets that it owns. Even though the starting point for Hart’s approach is the transaction cost theory developed by Coase and Williamson, it focuses mainly on the firm’s physical (non-human) assets. Hart criticises the Coasean approach to the organization of the firm as a relationship of hierarchical control (similar to an employer-employee relationship) in that it failed to establish the source of the employer’s authority. In the absence of physical assets, Hart argues, it is difficult to define authority in the context of a firm. Instead it is the ‘control over nonhuman assets [that] leads to control over human assets’.⁸⁷

According to Hart, the importance of the ownership of assets lies in the fact that it provides a solution to the problem of contract incompleteness: in the absence of contractual terms specifying any possible aspect of the usage of a physical asset, the owner of this asset has residual control rights over that asset, in the sense that he has the right to take decisions regarding all usages thereof.⁸⁸ Based on this assumption, Grossman and Hart define vertical integration as ‘the purchase of the assets of a supplier (or of a purchaser) for the purpose of acquiring the residual rights of control’.⁸⁹