Firms’ Organization and Efficient Communications Networks

This paper presents a very simple characterization of the technological choices underlying M-form and U-form organizations. We first show that the externalities within a function favour the M-form, which gives higher profit, higher output level and lower prices than the U-form. The major innovation of the paper consists in the analysis of communication flows that constitute a positive externality on demand schedules. When these information flows are introduced, we find conditions under which the U-form gives output and communication flows higher than the M-form. Copyright 2001 by Blackwell Publishers Ltd and The Victoria University of Manchester