This text documents an approach to explaining the existence of firms and markets, focusing on variability and co-ordination. It stands in contrast to the emphasis on transaction costs, and on monitoring and incentive structures, which are prominent in most of the modern literature in this field. This approach, called the variability approach, allows us to: show why both the need for communication and the co-ordination costs increase when the division of labour increases; explain why, while the firm relies on direction, the market does not; rigorously formulate the optimum divisionalization problem; better understand the relationship between technology and organization; show why the "size" of the firm is limited; and refine the analysis of whether the existence of a sharable input, or the presence of an external effect, leads to the emergence of a firm.

A new approach to explaining the existence of firms and markets, focusing on variability and coordination. It stands in contrast to the emphasis on transaction costs, and on monitoring and incentive structures, which are prominent in most of the modern literature in this field. This approach, called the variability approach, allows us to: show why both the need for communication and the coordination costs increase when the division of labor increases; explain why, while the firm relies on direction, the market does not; rigorously formulate the optimum divisionalization problem; better understand the relationship between technology and organization; show why the `size' of the firm is limited; and to refine the analysis of whether the existence of a sharable input, or the presence of an external effect leads to the emergence of a firm. The book provides a wealth of insights for students and professionals in economics, business, law and organization.

A model is an idealization. It is an abstract representation of a given perceived reality. To construct a model one abstracts from the unimportant features of that reality and replaces it by a formal structure, whose properties, explicitly assumed or logically de­ ducible from the stated assumptions, correspond to the interesting relationships of the reality being studied. The purpose of constructing a model is twofold: first, to help better understand a complex reality; second, to help make pre­ dictions with regard to still unobserved phenomena. The first purpose will be satisfied if the constructor of the model is able to identify and disregard the unimportant features of the reality being studied and replaces this reality by an easier to understand formal structure. By applying then the techniques of mathematics and logic to this formal structure we might be able to reach conclusions with regard to still unobserved phenomena, which will be of help in making predictions.

A model is an idealization. It is an abstract representation of a given perceived reality. To construct a model one abstracts from the unimportant features of that reality and replaces it by a formal structure, whose properties, explicitly assumed or logically de­ ducible from the stated assumptions, correspond to the interesting relationships of the reality being studied. The purpose of constructing a model is twofold: first, to help better understand a complex reality; second, to help make pre­ dictions with regard to still unobserved phenomena. The first purpose will be satisfied if the constructor of the model is able to identify and disregard the unimportant features of the reality being studied and replaces this reality by an easier to understand formal structure. By applying then the techniques of mathematics and logic to this formal structure we might be able to reach conclusions with regard to still unobserved phenomena, which will be of help in making predictions.

This text documents an approach to explaining the existence of firms and markets, focusing on variability and co-ordination. It stands in contrast to the emphasis on transaction costs, and on monitoring and incentive structures, which are prominent in most of the modern literature in this field. This approach, called the variability approach, allows us to: show why both the need for communication and the co-ordination costs increase when the division of labour increases; explain why, while the firm relies on direction, the market does not; rigorously formulate the optimum divisionalization problem; better understand the relationship between technology and organization; show why the "size" of the firm is limited; and refine the analysis of whether the existence of a sharable input, or the presence of an external effect, leads to the emergence of a firm.

A new approach to explaining the existence of firms and markets, focusing on variability and coordination. It stands in contrast to the emphasis on transaction costs, and on monitoring and incentive structures, which are prominent in most of the modern literature in this field. This approach, called the variability approach, allows us to: show why both the need for communication and the coordination costs increase when the division of labor increases; explain why, while the firm relies on direction, the market does not; rigorously formulate the optimum divisionalization problem; better understand the relationship between technology and organization; show why the `size' of the firm is limited; and to refine the analysis of whether the existence of a sharable input, or the presence of an external effect leads to the emergence of a firm. The book provides a wealth of insights for students and professionals in economics, business, law and organization.

A model is an idealization. It is an abstract representation of a given perceived reality. To construct a model one abstracts from the unimportant features of that reality and replaces it by a formal structure, whose properties, explicitly assumed or logically de­ ducible from the stated assumptions, correspond to the interesting relationships of the reality being studied. The purpose of constructing a model is twofold: first, to help better understand a complex reality; second, to help make pre­ dictions with regard to still unobserved phenomena. The first purpose will be satisfied if the constructor of the model is able to identify and disregard the unimportant features of the reality being studied and replaces this reality by an easier to understand formal structure. By applying then the techniques of mathematics and logic to this formal structure we might be able to reach conclusions with regard to still unobserved phenomena, which will be of help in making predictions.

A model is an idealization. It is an abstract representation of a given perceived reality. To construct a model one abstracts from the unimportant features of that reality and replaces it by a formal structure, whose properties, explicitly assumed or logically de­ ducible from the stated assumptions, correspond to the interesting relationships of the reality being studied. The purpose of constructing a model is twofold: first, to help better understand a complex reality; second, to help make pre­ dictions with regard to still unobserved phenomena. The first purpose will be satisfied if the constructor of the model is able to identify and disregard the unimportant features of the reality being studied and replaces this reality by an easier to understand formal structure. By applying then the techniques of mathematics and logic to this formal structure we might be able to reach conclusions with regard to still unobserved phenomena, which will be of help in making predictions.