The main reason why it is profitable to establish a firm
The costs of negotiating and
concluding a separate contract forleach exchange transaction
which takes place on a market must also be taken into
account.‘ Again, in certain markets, e.g., produce exchanges,
a technique is devised for minimising these contract costs;
but they are not eliminated, It is true that contracts are
not eliminated when there is a firm but they are greatly
reduced. A factor of production (or the owner thereof)
does not have to make a series of contracts with the [actors
with whom he is co-operating within the firm, as would be
necessary, of course, if this co-operation were as a direct
result of the working of the price mechanism. For this
series of contracts is substituted one. At this stage, it is
important to note the character of the contract into which
a factor enters that is employed within a firm. The contract
is one whereby the factor, for a certain remuneration (which
may be fixed or fluctuating), agrees to obey the directions
of an entrepreneur within certain limits.’ The essence of
the contract is that it should only state the limits to the
powers of the enrrepreneuri Within these limits, he can
therefore direct the other factors of production.