Transaction Costs
Costs incurred in making an economic exchange beyond the price of the good or service itself.
Also known as: Transaction Cost Economics, Coasean Economics
Category: Business & Economics
Tags: economics, businesses, decisions, markets
Explanation
Transaction costs, a concept developed by Ronald Coase and Oliver Williamson, are the costs of participating in a market beyond the price of the goods or services exchanged. These include: search and information costs (finding what you need), bargaining and negotiation costs (reaching agreement), and enforcement costs (ensuring terms are met). Transaction costs explain why firms exist - when market transaction costs exceed the costs of internal coordination, it's more efficient to produce within a firm rather than buy from the market. High transaction costs arise from: asset specificity (investments tied to specific relationships), uncertainty (unpredictable outcomes), and frequency (repeated small transactions). Understanding transaction costs helps make better make-or-buy decisions, structure contracts, and design organizations. Technology often reduces transaction costs - the internet dramatically lowered search costs, enabling new business models and market structures.
Related Concepts
← Back to all concepts