Firms exist and integrate when markets are costlier than hierarchy.
Williamson's 1975 answer to Coase's question of why firms exist. Asset specificity, uncertainty and frequency determine whether a transaction is cheaper inside a hierarchy or in the market.
In practice
- A car maker buys the supplier that presses its body panels, and buys screws from whoever is cheapest that quarter.
- A firm that outsources a function requiring constant renegotiation has moved the cost rather than removed it.