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, and 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.
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", 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, is actually absent from his early work up to the 1970s. The term 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.
Arguably, transaction cost reasoning became most widely known through Oliver E. Williamson's 'Transaction Cost Economics'. 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.
Coase explains that, although the "gains which accrue from the existence of the organization …; come from a reduction in transactioncosts …, the main transactioncosts that are saved are those which would otherwise have been incurred in markettransactions between the factors now cooperating within the organization" and the organizers of the organization.
In this problem there are two kinds of cost: (1) carrying costs, which include the cost to the retailer of capital invested in inventory, storage costs, etc., and (2) transactioncosts, which include the cost of ordering, shipping and receiving, processing, and otherwise handling deliveries.
Total transactioncosts are assumed to be equal to the shipping and handling cost per item (b*) plus the cost per order (a*) for such activities as accounting for and processing the order.
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.
The term "transactioncost" 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.
Transactioncosts have been broadly defined by Steven N. 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.
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