Transaction cost

In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange. For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal. Or consider buying a banana from a store; to purchase the banana, your costs will be not only the price of the banana itself, but also the energy and effort it requires to travel from your house to the store and back; the costs above and beyond the cost of the banana as the transaction costs. When rationally evaluating a potential transaction, it is important not to neglect transaction costs that might prove significant.

A number of kinds of transaction cost have come to be known by particular names. Search and information costs are costs such as those incurred in determining that the required good is available on the market, who has the lowest price, etc.. Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract, etc.. Policing and enforcement costs are the costs of making sure the other party sticks to the terms of the contract, and taking appropriate action (often through the legal system) if this turns out not to be the case.

The term "transaction cost" was coined by Ronald Coase, who used it to develop a theoretical framework for predicting when certain economic tasks would be performed by firms, and when they would be performed on the market, work later taken up by Oliver Williamson.

These days, Transaction Cost Economics is used to explain a number of different behaviors. Often this involves considering as "transactions" not only the obvious cases of buying and selling, but also day-to-day emotional interactions, informal gift exchanges, etc.. ...