Adaptation costs, coordination costs and optimal firm size

Abstract

Adaptation costs decrease and coordination costs increase with the size of the firm. This trade-off is used to determine an optimal firm size. The value of this optimal size is a function, among other factors, of the degree of variability of the environment: The greater the variability the smaller the optimal size and vice versa. Its existence depends crucially on the presence of an indivisibility, regarding the coordination activity. This indivisibility, or fixity is, I conjecture, the fixed factor of production that neoclassical economics needs to explain why the average cost curves are U-shaped.