Short answers, pulled from the story.
The theory of the firm is a body of economic theories that explain why firms exist, how they are structured, where their boundaries with the market lie, and what drives differences in their behavior and performance. It encompasses transaction cost theory, managerial and behavioural theories, property rights approaches, and sociotechnical perspectives.
Ronald Coase, in his 1937 essay "The Nature of the Firm," argued that firms emerge to avoid the transaction costs of using the market: discovering prices, negotiating separate contracts for each exchange, and renegotiating under uncertainty. A firm replaces a multitude of market contracts with a simpler authority relationship between manager and employee.
The Grossman-Hart-Moore theory, developed through papers by Sanford Grossman, Oliver Hart, and John Moore in 1986, 1990, and 1995, is the property rights approach to firm boundaries. It argues that when contracts are incomplete, ownership of physical assets determines bargaining power after investments are sunk, and that the party with the more important investment decision should be the owner.
Bounded rationality, a concept from Herbert Simon's work in the 1950s, holds that people have limited cognitive ability and cannot optimize fully in complex, uncertain situations. Richard Cyert and James March of the Carnegie School built on this to argue that firms do not maximize profit but instead "satisfice," pursuing realistic goals while managing the conflicting interests of different internal groups.
The hold-up problem, associated with Oliver Williamson's work on asset specificity, occurs when one party makes a relationship-specific investment that becomes a sunk cost, leaving them vulnerable to renegotiation by the other party. Once the investment is made, the investing party may be forced to accept worse terms or incur a loss, creating incentives to merge or integrate rather than transact across firm boundaries.
According to Coase, firm size is determined by two forces: the costs of using the price mechanism in the market and the costs of organizing transactions internally. The firm grows until the cost of internalizing one more transaction equals the cost of letting the market handle it, with diminishing returns to management being the primary factor that raises internal costs as size increases.