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 find out which of the various banana products you prefer,where to get them and at what price,the cost of travelling from your house to the store and back,the time waiting in line,and the effort of the paying itself; the costs above and beyond the cost of the banana are the transaction costs.When rationally evaluating a potential transaction,it is important to consider 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 and so on.In game theory this is analyzed for instance in the game of chicken.
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" is frequently thought to have been 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.However,the term is actually absent from his early work up to the 1970s.While he did not coin the specific term,Coase indeed discussed "costs of using the price mechanism" in his 1937 paper The Nature of the Firm,where he first discusses the concept of transaction costs.The term "Transaction Costs" itself can instead be traced back to the monetary economics literature of the 1950s,and does not appear to have been consciously 'coined' by any particular individual [1].
Arguably,transaction cost reasoning became most widely known through Oliver E.Williamson's Transaction Cost Economics.Today,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.
The determinants of transaction costs are according to Williamson frequency,specificity,uncertainty,limited rationality,and opportunistic behaviour.
At least two definitions of the phrase "transaction cost" are commonly used in literature.Transaction costs have been broadly defined by Steven N.S.Cheung as any costs that are not conceivable in a "Robinson Crusoe economy" -- in other words,any costs that arise due to the existence of institutions.To Cheung,"transaction costs",if the term is not so popular in economics literatures,should be called "institutional costs" [2] [3].But many economists seem to restrict the definition to exclude costs internal to an organization [4].The latter definition parallels Coase's early analysis of "costs of the price mechanism" and the origins of the term as a market trading fee.
Starting with the broad definition,many economists then ask what kind of institutions (firms,markets,franchises,etc.) minimize the transaction costs of producing and distributing a particular good or service.Often these relationships are categorized by the kind of contract involved.This approach sometimes goes under the rubric of New Institutional Economics.