In the first commentary, I treated the internal organization of the firm as a different topic from that of the firm's existence. This creates a communication problem that we had best face here. The concept of the firm that is familiar to readers who have followed recent writings about the firm identifies the firm with a type of organization that relies heavily on the managed coordination of a work force. In this literature, for example, a reduction in the cost of transacting is viewed not only as a source of vertical integration, which clearly is an aspect of the firm's organization, but also as a substitution of the firm for the market, which comes close to identifying managed coordination as the essence of the firm. Consistent with this impression is the notion, deriving from Coase's work, that positive transaction cost is the reason the firm exists. In the first commentary, the firm is defined as an institution that specializes in the production of goods for others; on this view, a firm may exist if the efforts of some are managed by the direction of others, but this interpersonal direction is not necessary and is not the essence of the firm. A single person can constitute a firm, producing goods for the use of others.

Clearly organizational questions must be faced by the single-person firm. How big should the firm be? How vertically integrated should its activities be? What controls should the owner-worker in this firm use when dealing with suppliers?