Ronald Coase, corporate theorist. Steve Ballmer fan? Source: University of Chicago Law School via Bloomberg
Ronald Coase, corporate theorist. Steve Ballmer fan? Source: University of Chicago Law School via Bloomberg

Over the Labor Day weekend, Microsoft said it would shell out more than $7 billion to buy Nokia’s handset unit and get a long-term license on its patents. Traders seem to think Nokia got the better end of the deal: Its share price is up by more than one-third since the announcement, while Microsoft’s market value has fallen by about 6 percent.

Nokia shareholders certainly have reason to be happy: They ditched a money-losing division for cash, enabling the company to focus on the relatively more profitable business of selling network equipment. (Of course, they might have been in a much better position had Nokia decided to make phones using Google’s Android operating system rather than Microsoft’s Windows.) While I wouldn’t want to question the judgment of the professionals who have money on the line, it’s also possible that Microsoft made a good move as well.

To see why, it helps to look back at the work of Ronald Coase, a Nobel-winning economist who died yesterday at the age of 102. His prize was awarded in part for his research into the reasons why corporations exist. This might sound like an odd question to have to ask, but standard economics theory says that market prices provide the best signals for how to allocate resources. In theory, that means we ought to live in a world where everyone contracts out his labor and capital as needed. In practice, however, businessmen find it advantageous to organize people and machines and patents into corporations that are centrally managed. (A weird hybrid model can be found at Sears.)

Coase’s explanation was that negotiations and auctions cost time and money:

The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism. The most obvious cost of “organising” production through the price mechanism is that of discovering what the relevant prices are. This cost may be reduced but it will not be eliminated by the emergence of specialists who will sell this information. The costs of negotiating and concluding a separate contract for each exchange transaction which takes place on a market must also be taken into account.

What does this have to do with Microsoft and Nokia?

Nokia has been Microsoft’s main partner for making Windows smartphones, but it has been losing so much money from that business that some people think it was on the verge of bankruptcy. (That’s a sad state of affairs for the Finnish company, which first sold cell phones with e-mail capabilities back in 1996.) By contrast, Microsoft is still one of the world’s most valuable companies -- its market capitalization is about the same as Google’s -- and possesses tens of billions of dollars in cash (mostly offshore).

Per Coase, the acquisition allows the tech giant to continue to invest in mobile technology without having to worry as much about whether it was making money right away. That might not turn out well -- Bloomberg View’s editors think that Microsoft should just give up and die -- but it doesn’t strike me as an obviously wrongheaded strategy for a company that has watched smartphones and tablets displace personal computers. After all, Nokia’s low-end phones are extremely popular in poorer countries. Optimists argue that, given time, those low-margin devices could prove to be the first step on a ladder up to high-margin smartphones powered by Windows. That would be a sweet victory for Steve Ballmer, Microsoft’s chief executive officer -- and also for Ronald Coase.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)