2 - Theoretical Foundations

Summary

Chapter 2 provides the theoretical foundations of this book. It explains why the economic theory, considering the firm as a ‘black box’ integrated the internal and organisational dimension of the firm into economic thinking. Specialisation of labour, limited information and opportunism of actors are at the heart of the existence of firms. These considerations also justify the need for competition law to, metaphorically, ‘open the black box’, for a variety of purposes. Second, this chapter describes the theoretical and analytical features of the firm and of its boundaries that are essential to determine the substantive reach of competition law vis-à-vis corporate governance. The so-called ‘theory of the firm’ in all its variations, explains the existence, and the nature of the firm, as well as its boundary with the market. Third, this chapter introduces the agency theory that focuses on the behavioural implications of bounded rationality within firms in which ownership are control are separate functions. The agency relationship is the raison d’être of corporate governance mechanisms, designed to reduce adverse consequences of bounded rationality. The agency relationship will be a core object of analysis in developments on enforcement aspects of competition law.