Background
The First World War period saw a change of emphasis in economic theory away from industry-level analysis which mainly included analyzing markets to analysis at the level of the firm, as it became increasingly clear that perfect competition was no longer an adequate model of how firms behaved. Economic theory until then had focused on trying to understand markets alone and there had been little study on understanding why firms or organisations exist. Markets are mainly guided by prices as illustrated by vegetable markets where a buyer is free to switch sellers in an exchange.
The need for a revised theory of the firm was emphasized by empirical studies by Berle and Means, who made it clear that ownership of a typical American corporation is spread over a wide number of shareholders, leaving control in the hands of managers who own very little equity themselves. Hall and Hitch found that executives made decisions by rule of thumb rather than in the marginalist way.
Read more about this topic: Theory Of The Firm
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