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 not to neglect transaction costs that might prove significant. Economics (from the Greek οίκος [oikos], family, household, estate, and νομος [nomos], custom, law, hence household management and management of the state) is a social science that studies the production, distribution, trade and consumption of goods and services. ... In economics, business, and accounting, a cost is a price paid, or otherwise associated with, a commercial event or economic transaction. ... See stock (disambiguation) for other meanings of the term stock In financial terminology, stock is the capital raised by a corporation, through the issuance and sale of shares. ... In commerce, a broker is a party that mediates between a buyer and a seller. ...

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. A contract is a promise or an agreement that is enforced or recognised by the law. ... Game theory is a branch of applied mathematics that studies strategic situations where players choose different actions in an attempt to maximize their returns. ... The game of chicken (also referred to as playing chicken) is a game in which two players engage in an activity that will result in serious harm unless one of them backs down. ... Ronald Coase (born December 29, 1910) is a British economist. ... Firm can have several meanings: Firm - a loose legal term for a company. ... A physical marketplace in Portugal enables buyers and sellers of produce to do business with each other. ...

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. Oliver E. Williamson (born September 27, 1932) is a prominent author in the area of transaction cost economics, a student of Ronald Coase and Herbert Simon. ... Look up Trade in Wiktionary, the free dictionary Trade centers on the exchange of goods and/or services. ... Sales, or the activity of selling, forms an integral part of commercial activity. ... Look up Gift in Wiktionary, the free dictionary This page is about gifts in the common English-language sense. ...

The determinants of transaction costs are according to Williamson frequency, specificity, uncertainty, limited rationality, and opportunistic behaviour.

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". (See Steven N. S. Cheung "On the New Institutional Economics", Contract Economics, L. Werin and H. Wijkander (eds.), Basil Blackwell, 1992, pp. 48-65.) Steven N. S. Cheung (1935-), a Hong Kong born economist, specializes in the fields of transaction costs and property rights. ... Robinson Crusoe and Man Friday by Carl Offterdinger Robinson Crusoe is a novel by Daniel Defoe, first published in 1719 and sometimes regarded as the first novel in English. ... It has been suggested that this article or section be merged with Social organisation. ...

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. Franchising (from the French for free) is a method of doing business wherein a franchisor licenses trademarks and methods of doing business to a franchisee in exchange for a recurring royalty fee. ... A contract is a promise or an agreement that is enforced or recognised by the law. ... New institutional economics is a school of heterodox economics, which builds on old institutional economics arguments about the embeddedness of economic activity in social and legal institutions, using Ronald Coases fundamental insight about the critical role that transaction costs play in determining economic structures and peroformance. ...

IT's relationship to transaction costs

Implementing a new information technology is generally seen as a means for reducing the transaction costs of an organisation. However, in practice, implementing new IT often results in higher transaction costs. This is because the amount of information that needs to be processed by the organisation increases. This can result in information overload. Antonio Cordella and Kai A. Simon (Cordella & Simon, 1997; Cordella, 2001) call the cost of processing this information coordination cost. If these costs exceed the benefits of IT, then the implementation becomes something negative and expensive. (For an alternative view of coordination costs, see Malone, Yates, and Benjamin, 1987.) Information technology (IT) or Information and communication(s) technology (ICT) is a broad subject concerned with technology and other aspects of managing and processing information, especially in large organizations. ... Information technology (IT) or Information and communication(s) technology (ICT) is a broad subject concerned with technology and other aspects of managing and processing information, especially in large organizations. ... This article needs to be cleaned up to conform to a higher standard of quality. ... Information technology (IT) or Information and communication(s) technology (ICT) is a broad subject concerned with technology and other aspects of managing and processing information, especially in large organizations. ... Information overload refers to the state of having too much information to make a decision or remain informed about a topic. ...

To reduce coordination costs, organisations can do one of two things:

1. Improve information processing capabilities. This can be done either through implementing new information systems or creating lateral relations (Galbraith 1973).
2. Use IT to reduce the need for coordination through increased slack resources (which reduces the need for extreme precision) or increased reliance on self-contained tasks which provides more of the information to a single point of contact rather than requiring communications and coordination among multiple units (Galbraith 1973). The decreased amount of information to process means lower coordination costs and lower transaction costs.

Technologies like enterprise resource planning (ERP) can provide technical support for these strategies. In general, information processing is the changing (processing) of information in any manner detectable by an observer. ... ERP is a TLA (three-letter acronym) that may stand for: European Recovery Program, more commonly known as the Marshall Plan Effective radiated power, a term used in radio communications for calculating the power of a communications system in terms of its gains and losses. ...

Information Infrastructure's relationship to transaction costs

Firms, or more generally, organizations, develop and become larger along time, using more and more computers to work. This growth in the number of computers leads to a growth of software use (operating systems and their applications, for example) and, as a result, to the growth in the number of software use/access licenses to be purchased and managed. For the owners of software intellectual property rights, this process leads to a greater supervision of users to regulate/enforce lawful access to software. Information infrastructures are defined by (Hanseth, 2002) as a shared, evolving, open, standardized, and heterogeneous installed base References Ole Hanseth, 2002. ... Computer software (or simply software) refers to one or more computer programs and data held in the storage of a computer for some purpose. ...

The situation occurs when all of the software used by an organization is proprietary. This results in some costs — transaction costs — that are not usually taken into account by administrators and managers. The use of FLOSS - Free/Libre/Open Source Software leads to a reduction in transaction costs in terms of computation costs and in terms of the number of managed contracts, which can be numerically reduced by half. Proprietary indicates that a party exercises private ownership, control or use over an item of property, usually to the exclusion of other parties. ... Look up Administration in Wiktionary, the free dictionary The word administration is from the Middle English administracioun, deriving from the French administration, which is itself derived from the Latin administratio: a compounding of ad (to) and ministratio (to give service). In modern usage, the word has particular meanings in particular... Management (from Old French ménagement the art of conducting, directing, from Latin manu agere to lead by the hand) characterises the process of leading and directing all or part of an organization, often a business, through the deployment and manipulation of resources (human, financial, material, intellectual or intangible). ... The term Free/Libre and Open Source Software (FLOSS or sometimes FOSS) is a hybrid term for both free software and open source software. ...

References

• Cordella, A. & Simon, K.A. (1997), 'The Impact of Information Technology on Transaction and Coordination Cost', Conference on Information Systems Research in Scandinavia (IRIS 20), Oslo, Norway, August 9-12
• Cordella, A. (2001), 'Does Information Technology Always Lead to Lower Transaction Costs?', The 9th European Conference on Information Systems, Bled, Slovenia, June 27-29
• Galbraith, J. A. (1973), Designing Complex Organizations, Addison-Wesley Longman Publishing Co., Inc., Boston, MA.
• Malone, T. W., J. Yates and R. I. Benjamin (1987), "Electronic Markets and Electronic Hierarchies," Communications of the ACM, 30, 484-497.
• Soares, MVB (2004), 'Reducing Transaction Costs in Information Infrastructures using FLOSS - Free/Open/Libre Open Source Software', 4S/EASST Conference, Paris, France, August 26-28

External links

• Transaction cost economics
• Coordination Costs