Web 2.0 Killed Coase’s Law

In 1937 Ronald Coase published a paper titled The Nature of the Firm, which explains why many large companies exist:

Firms will tend to expand until the cost of organizing an extra transaction within the firm becomes equal to the costs of carrying out the same transaction in the open market.

The Internet has caused transactions costs to plunge and made it easier for companies to innovate and outsource. Think about all those feisty upstarts that have put up a website to challenge the bricks-and-mortar outfits.

Now add in Web 2.0 tools, which are breeding open platforms, creating new communities to engage customers, and driving brand affinity and all the innovation that comes from truly listening to your customers. The net effect? Coase’s Law is, if not dead, at least mortally wounded.

So what does this all mean? Smart Buzz Marketers are working inside their organizations to increase differentiation. If you think broadly about Coase’s Law, your company may be able to outsource numerous processes, open its platforms and create communities with its customers, thus allowing you to stick to your core. But you better have a highly differentiated or specialized core. Otherwise, you’re headed for commodity status.

4 comments to Web 2.0 Killed Coase’s Law

  • wolske

    I fail to see how this changes Coase’s Law. Coase’s Law stands:
    The impact of Web2.0 tools and platforms has the potential for equal impact on internal processes and outsourced processes.

    While it’s easy to see how many things can be outsourced, isn’t it also true that firms can exploit Web2.0 internally, reducing their costs and being more competitive than outsourced processes? Of course they need to focus on processes that differentiate them, but if they are good enough at it then the firm may actually find itself expanding by offering this service to others. Think UPS/FedEx and logistics… they now offer these services to others (an expansion, no?)

    If you’re trying to say that Coase’s Law is obsolete because everything can be “transacted on the open market” less expensively than internally, I think we’re a long way from that yet.

  • seanod

    Hi Paul – Glad I found your blog (Thanks Mukund). Many similar issues to discuss. I had a different take on this blogged here:(http://communitygrouptherapy.com/2007/02/28/exploring-communities-and-corporate-hr/)

    Coarse Law is a core aspect of the case the authors of wikinomics make, but I don’t take it in conflict with current trends driven by web 2.0. I see it more as an catalyst for a different kind of mfg to customer relationship/engagement model.

    GM, Community and MVP
    Microsoft corp

    Personal blog: http://www.communitygrouptherapy.com

  • JXL

    Seems to me that Coarse’s Law dictates the effect size for corporations.

    As the difference in cost between doing it yourself internally and sourcing from the market reduce, so should the size of the corporation as much more done externally through trade.

    Given that it is much easier to change suppliers than change a corporate department, a fluid web of smaller companies trading should outperform a larger corporation.

    Just as a free market economy outperforms planned economy?

    Isn’t this the trend we are seeing

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