Information Flow Analysis and the Theory of the Firm

In this paper, I examine the role the firm plays in economizing on information flows that are required to turn raw materials and ideas into products and services used by final consumers. Specifically, I argue that scale economies associated with complex information transfers are an important benefit of integration. This argument is distinct from theories that are based on incentives and leads to different or more refined conclusions in some cases. The differences are explored in the context of literature on specific assets, vertically related monopolies, and physical asset ownership. Information flow analysis also arms managers with a framework for addressing organizational questions beyond firm‐boundary decisions such as intrafirm decisions. Copyright © 2014 John Wiley & Sons, Ltd.