The Economist defines transaction costs as the costs incurred during the process of buying or selling, on top of the price of whatever is changing hands. If these costs can be reduced, the price mechanism will operate more efficiently
Wikipedia references Carl Dahlman (below) in noting that transaction costs “can be divided into three broad categories:
- Search and information costs are costs such as in determining that the required good is available on the market, which 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. On asset markets and in market microstructure, the transaction cost is some function of the distance between the bid and ask.
- 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.”
Atlas topic, subject, and course
The Economist, Transaction costs, Economics A-Z, at http://www.economist.com/economics-a-to-z/t#node-21529380, accessed 6 May 2016.
Wikipedia, Transaction cost, at https://en.wikipedia.org/wiki/Transaction_cost, accessed 1 June 2017, referencing Dahlman, Carl J. (1979). “The Problem of Externality”. Journal of Law and Economics. 22 (1): 141–162.
Page created by: Ian Clark, last modified 1 June 2017.
Image: Kaplan Financial Knowledge Bank, Transaction cost theory, at http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Transaction%20cost%20theory.aspx, accessed 1 June 2017.