Why Do Firms Exist?

...

On the contrary, the opportunity cost of the firms using independent market firms is the risk of ‘incomplete contract’ with market firms. It is difficult to guarantee the market firms respect and perform the responsibilities within the conditions of contract. Coordination is a major issue for firms producing special designed goods which require ‘perfect-fit’ amongst different components to assemble the finished products. The most critical consideration of using market firms is about sharing private information of firms to market firms which is a particular sensitive to the future development of the firms. (Example).

It is important to take into consideration of the competition and understand the game dimension in order to define the boundaries of firm by determining the make-buy dilemma. Assuming all players are rational, game theory is what its name implies. It analyses different game situations which are available to different firms in order to anticipate potential outcomes. Game theory applies perfectly with the breaking news this week about the exclusive acquisition of Nokia’s mapping system jointly by three leading German carmakers, Daimler, BMW and Volkswagen Group. The industry analyst regards this Nokia’s best mapping software in market with more precise and reliable mapping (than Google and Apple map) for car industry. This vertical integration of three German carmakers is to own the best mapping system which is the most critical device in connecting the vehicle and topographical data. The formation of this first-ever strategic partnership of three German leading carmarker is to prepare for the battle of the driverless car manufactured by Apple and Google.

In conclusion,

http://www.businessdictionary.com/definition/transaction-cost.html

http://www.investopedia.com/ask/answers/09/game-theory-business.asp#ixzz3hLnv5VZs