In simplified terms, the theory of the firm aims to answer these questions[1]:
- Existence – why do firms emerge, why are not all transactions in the economy mediated over the market?
- Boundaries – why the boundary between firms and the market is located exactly there? Which transactions are performed internally and which are negotiated on the market?
- Organization – why are firms structured in such specific way? What is the interplay of formal and informal relationships?
Part of question 2: the boundary between firm and market is sharp iff firm-firm interactions can be characterized by a few simple dimensions like price and quantity – we call these transaction-based interactions, and call such products commodities. When we don’t know how to reduce the interaction, the idea of a “market” is not useful, and we call those interactions relationship-based.
It’s a false spectrum, because “transaction-based” is a lot more informative than “relationship-based”, which really means “everything else” – we say “relationship-based”, but I think it is more aptly described as “non-transaction-based”.