Sloman et al, (2010: 35) defines firms as ‘An economic organization that coordinates the process of production and distribution’. In addition, ‘Firms are arranged frameworks relating people, things, knowledge, and technologies, in a design intended to achieve specific goals’ (Clegg et al, 2011). The main concept behind firms is to transform the input into outputs (Sloman et al, 2013). To give out a few examples of firms in different production lines for instance as clothes, cars, phones and others such as Apple and Samsung, H&M and Gucci, BMW and General Motors.
According to Coase (as cited in Formaini, R and Siems, T, 2003) the firms are responsible for production and distribution of goods and services and firms are of upmost importance because they reduce the transaction costs which would usually cost a lot more if carried out by an individual compared to the firm. We will discuss transaction costs in greater details; however, it’s also important to know how firms are organized and how they operate.
Firms are organized and they operate in different manners and ways for instance, goods and services they produce, the industries they are located in, the size of the operating firm, and the legal structure of the firm. The legal framework of the firm is very important and will have an impact on its performance, production and operations and thus we will be concentrating on it in order to exemplify the classification of firms in different ways. In the UK, there are several types of firm, each with a distinct legal status. Some examples are shared below: 3.1. Sole proprietor: (Business owned by just one person with only a few employees; they are easy to setup and requires less investment. The disadvantages are limited scope of expansion and unlimited liability which means; the owner is personally liable for any losses that the business might make. 3.2. Partnership: (Two or more individuals own the business); up to 20 individual/groups can partner together to form a partnership: there is scope for expansion, more investment could be done and more stakeholders mean more experts on different field and they can contribute through their specific expertise. Many partnerships still have unlimited liability which means the mistakes of one partner has an effect on the other. 3.3. Companies: (legally separate from its owner) which gives it the ability to get in to contracts and own property separately from its owner. Owners have share in the companies depending on their sizes. The owners lose as much as they invest. 3.4. Cooperatives, and Public Corporations: These are state owned enterprises which are run by the board and are separate from the government but the board members are appointed by the ministers of the government. 3. Transaction Costs:
One of the biggest factors that firms exist is because they reduce the cost of transaction as mentioned earlier and so; Coase (1937) was one of the first indicating out that in addition to the general cost of production, one must also consider transaction costs in clarifying firms. Coase (1937) focused on the comparative transaction costs of alternative organizational structures, such as firms and markets extended later by Oliver Williamson and became popularly known as transaction-cost economics (Williamson, 1985) or more generally the economics of organizations. Transaction Cost is the cost incurred when making economic contracts in the marketplace (Sloman et al, 2010). It is furthermore added that transaction costs could also be costs (e.g. in terms of money or time) incurred when making any economic exchange.
In general, the cost of transaction could be called a friction loss or losing resource(s) in order to reach a goal. In firms, transaction costs may also be operational activities that the firm carries such as planning activities and limiting as well as allocating risks which may be raised in the future. There it may include elements of doubt/uncertainty and opportunism, which are both essential for debates in corporate governance.
Coase (1937) argued in his article that transaction costs explain both the existence of firms and their optimal size. In ‘The Nature of the Firm’ he identified certain transactions which are prohibitively costly if the parties involved could only deal with instant market transactions. In order to carry out a market transaction it is necessary to identify the party one wishes to deal with, establishing terms and conditions, conducting negotiations and concluding a contract. After the conclusion of the contract monitoring is needed to make sure that all terms and conditions are fulfilled. If slight changes are wished, the whole transaction process needs to be initiated again. Or, to put it in other words, Coase emphasized that making contracts, purchasing assets and other property in markets incurred costs that were not accounted for by the “price mechanism”.
Individuals would therefore organize firms and maintain them when the organizational entity provided implicit savings in terms of assembling resources, assets, and labour internally.
One could as well argue that trasanaction costs could be minor in a world without transactions. This can be achieved if duties are pre-assigned the “right” way. Based on this Armen Alchian and Harold Demsetz constructed their theory on property rights. Property can be tangible such as equipment in a firm and intangible such as intellectual property. The theory of property rights says that the ownership that includes lasting rights to the benefits of ownership, of productive assets provides a foundation for explaining firms. According to one of the leading scholar, Oliver Hart, a firm without property is just a phantom (Hart, 1995). In circumstances that usual contractual dealings flop, firms arise and the ownership of capital assets puts people in the position to organise production through the purchase of economic factors, including labour (Hart, 1995).

The hold-up Problem:
In situations where more than one stakeholder is involved and the investment is done by at least one of them. There is a chance the hold-up problem might arise (Krishna, 2010). That is when the investor cannot recover the cost of the investment ex-post because after the investment is made it has no other use and it’s sunk. As a result, the other party which could be 3rd party or external contractors will want to squeeze the investor to recover its capital investment while they were providing services to the investor or their operating costs. This could be practically seen in situations such as the Oil pipelines where getting the oil out is a big investment activity. However, an oil extraction point is not much of value without a pipeline which would be used to ship the oil from the extraction point to the refinery and it is useless for a refinery to exist if there is no Oil. Therefore, the firms that do the pipeline business in the oil industry can buy the oil in a low price and sell it on a much higher price to the refineries. If you compare the pipeline business with the refinery and well (extraction point) the profitability is much higher. This cannot be prevented too as pipelines are natural monopolies. However, reasoning backwards, both the oil well owners and the refinery owners are aware that if they have lack of control by the price charged by the pipeline, they will not be likely to recover their costs of investment. Therefore, they will not invest. The possibility that investors in the oil wells and refineries will not be able to recover their investment may result in no investment being made.
In order to prevent the hold-up problem there are several ways including repeated interactions, coalitions, contracts, and vertical integration.
Repeated interactions is when the investor doesn’t invest all at once and requires that the investor invests in a continuous periodical basis. This results in the awareness of all parties that if the investor doesn’t get sufficient returns to cover the initial investment He/she will end up not investing anymore/again. This results in fair business between all parties where everybody gets a deserved share of profit.
Coalitions are used when the repeated interactions aren’t enough to resolve the problem for instance in cases where the one-time gain for the cheater is more than the value of the potential cheaters firm and the cheater is not concerned about future business with the investor. However, if the cheater is facing a coalition that has the capability to exclude him both economically and socially, this is a much bigger punishment, and it dramatically increases the chances of resolving the problem.
Contracts could also be signed between the investor and the other party which gives the investor the chance to trust the other party. If he does not carry out his contractual obligations, his incentives to cheat will be minimized. Knowing that it is not in the best interest of his opponent to take advantage of him after he incurs the investment costs.
Lastly one could use vertical integration although it does increase the administrative cost if contracts don’t work because of the loopholes in the contract and the litigation of costs. 4. How do firms Set prices?:
As stated by Mankiw, G (2012: 279) ‘The difference in the structure of the market defines the prices and the level of production of the firms’. Meanwhile, the price mechanism as explained by Sloman et al (2013) is that prices deflation is caused by shortages and surpluses. While shortage may cause prices to increase shortages normally decrease the prices. The markets are adjusted by supply and demands. Such changes result in ‘disequilibrium’ which could be later restored by an ‘equilibrium’ (i.e. a balance of demand and supply). 5. The SCP Model: In order to understand how firms set prices it’s important that one understands how the market is structured and thus one could use the structure-conduct-performance (SCP) model to contextualize how the prices perform. The theoretical framework of SCP is developed in industrial-organization economics (Rothaermel, F, 2012). In accordance to the SCP model the performance of the business is influenced by the market in which it operates. (Sloman et al, 2013:13). The structure of the industry has a lot of influence in how the firm operates and thus it influences the prices too. Meanwhile, external factors that are not really in the firms control such as government policies, regulations, environmental issues also have an affect on the firm and it’s pricing methodology. The Figure illustrates how SCP functions: Figure 1: Structure-Conduct-Performance Paradigm (Sidball, S, 2014). pricing is supposed to be an internal conduct element to the firm we can see that it does get affected by external performance, structure and government policies. The Conduct can influence the Structure and Performance of the firm. The price is a very important element of the firm because it can influence performance and the overall structure of the firm. The SCP model categorizes market structure into four main industry types (Rothaermel, 2012) namely, Perfect competition, monopoly, monopolistic competition and oligopoly. All these 4 industries have different prices behaviors and characteristics. 6. Market observations:
Data gathering is one of the techniques that is used by firms to find out how it’s product has changed with time. Many firms will have different types of measures in place to gather data from different consumers on a daily to yearly basis. The information could be used to do different kinds of analysis such as how the sales have varied from one part of the market to another and how if they need to adjust their prices of marketing tools in different areas that have had less consumers attracted to their product. Sloman et al (2013 :101) states that the ‘Market experiments Information gathered about consumers under artificial or simulated conditions. A method used widely in assessing the effects of advertising on consumers’.
The information collected from consumers could be used for different business attempts; one way to use it is could be to find out the difference between the quantity demand and the factors that influence demand. This will result in predicting how the demand for the product would change in the future if one or more causes of the demand changed. Sloman et al (2013) states that one could represent relationship between the demand of a product and the causes of demand in the form of an equation which is also called as demand function. 7. Alternatives of prices
The information shared above are just a small fraction of how firms set price. Usually when firms don’t have a lot of information about their product, it’s consumption, the supply of the product or their competitors as stated by Sloman et al, (2013) they may use the traditional ways such as Cost-based pricing, price discrimination, peak-load pricing and two-part tariff.
There has been a lot of research done on the behavior of firms while setting prices such as the ones in Australia (Park et al, 2010), the Ireland (Keeney et al, 2010 and the UK (Greenslade et al, 2008). Greesnalde et al, (2008) states that the globe is leaning towards price setting based on both internal costs and the market prices. He explains that corporates use more variable mark-up pricing compared to smaller scale companies. From a perspective of competition, firms that observe facing stronger competition are naturally more in favor of setting prices based on the competition compared to other approaches. Park et al (2010) also states that ‘the industry where the firm was located was an important factor, for example cost-focused strategies were dominant for the construction and transport and storage industries. In contrast, pricing was more demand-focused in the commodity producing agriculture and resource industries’.
I work with the World Bank Group in Afghanistan under the South Asia region. We are the biggest lending development firm in the world for many of the developed nations we provide loans that are charged on interest to them and the prices for each are different which really depends on the classification of the nations that we provide loan to as developed, under-developed, fragile and conflict states and others. Meanwhile, the sustainability of the results that would be achieved through the project/loan is a factor for us to decrease of increase the interest-rate on a case by case basis; in another instance, in Afghanistan since it comes under both the under-developed countries list and the fragile states many of our projects are simply grants to the government of Afghanistan and they are exempted from paying back or any interest rates either.
The way the World Bank works is different than many other commercial businesses; while the commercial business prioritizes to thrive for profit we thrive for achieving long term strategic objects that feed in to our main goal of ending poverty and boosting shared prosperity.

8. Conclusion:
A firm is a type of business organization that has partnerships between different parties in the process of distribution and production. There are different kinds of firms that are classified based on their industries. Different firms show different behavior when setting prices; they could be using routine methods or if there is room to innovate they could use something different but it boils down to their own requirements and how they could maximize the profit. The character of the firm can have an influence on the way they set prices but there is no rule to be followed when setting the prices.

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