Definition
Williamson defines transaction costs as a cost innate in running an economic system of companies, comprising the total costs of making a transaction, including the cost of planning, deciding, changing plans, resolving disputes, and after-sales. According to Williamson, the determinants of transaction costs are frequency, specificity, uncertainty, limited rationality, and opportunistic behavior. Douglass North states that there are four factors that comprise transaction costs – "measurement", "enforcement", "ideological attitudes and perceptions", and "the size of the market". ''Measurement'' refers to the calculation of the value of all aspects of the good or service involved in the transaction. ''Enforcement'' can be defined as the need for an unbiased third party to ensure that neither party involved in the transaction reneges on their part of the deal. These first two factors appear in the concept of ''ideological attitudes and perceptions'', North's third aspect of transaction costs. Ideological attitudes and perceptions encapsulate each individual's set of values, which influences their interpretation of the world. The final aspect of transaction costs, according to North, is ''market size'', which affects the partiality or impartiality of transactions. Dahlman categorized the content of transaction activities 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 and decision costs'' are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriateHistory
The idea that transactions form the basis of an economic theory was introduced by the institutional economist John R. Commons in 1931. He said that: The term "transaction cost" is frequently and mistakenly 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. 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, marking the first time that the concept of transaction costs was introduced into the study of enterprises and market organizations. The term "Transaction Costs" itself can be traced back to the monetary economics literature of the 1950s, and does not appear to have been consciously 'coined' by any particular individual. Robert Kissell and Morton Glantz, ''Optimal Trading Strategies'', AMACOM, 2003, pp. 1-23. Transaction cost as a formal theory started in the late 1960s and early 1970s. And refers to the "Costs of Market Transactions" in his seminal work, '' The Problem of Social Cost'' (1960). 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 behaviours. Often this involves considering as "transactions" not only the obvious cases of buying and selling, but also day-to-day emotional interactions and informal gift exchanges. Williamson was one of the most cited social scientists at the turn of the century, and was later awarded the 2009 Nobel Memorial Prize in Economics. Technologies associated with the Fourth Industrial Revolution such as distributed ledger technology and blockchains may reduce transaction costs when compared to traditional forms of contracting.Examples
A supplier may bid in a very competitive environment with a customer to build a widget. To make the widget, the supplier needs to build specialized machinery that cannot be used to make other products. Once the contract is awarded to the supplier, the relationship between customer and supplier changes from a competitive environment to aDifferences from neoclassical microeconomics
Williamson argues in ''The Mechanisms of Governance'' (1996) that Transaction Cost Economics (TCE) differs from neoclassical microeconomics in the following points: The transaction costs frameworks reject the notion of instrumental rationality and its implications for predicting behavior. Whereas instrumental rationality assumes that an actor's understanding of the world is the same as the objective reality of the world, scholars who focus on transaction costs note that actors lack perfect information about the world (due to bounded rationality).Game theory
In game theory, transaction costs have been studied by Anderlini and Felli (2006). They consider a model with two parties who together can generate a surplus. Both parties are needed to create the surplus. Yet, before the parties can negotiate about dividing the surplus, each party must incur transaction costs. Anderlini and Felli find that transaction costs cause a severe problem when there is a mismatch between the parties' bargaining powers and the magnitude of the transaction costs. In particular, if a party has large transaction costs but in future negotiations it can seize only a small fraction of the surplus (i.e., its bargaining power is small), then this party will not incur the transaction costs and hence the total surplus will be lost. It has been shown that the presence of transaction costs as modelled by Anderlini and Felli can overturn central insights of the Grossman-Hart-Moore theory of the firm.Evaluative mechanisms
Oliver E. Williamson's theory of evaluative mechanisms assess economic entitles based on eight variables: bounded rationality, atmosphere, small numbers, information asymmetric, frequency of exchange, asset specificity, uncertainty, and threat of opportunism. * Bounded Rationality: refers to the physical and mental, intellectual, emotional and other restrictions imposed by people participating in the transaction in order to maximize their interests. * Atmosphere: The reason for increasing the difficulty of the transaction here is mostly because both parties to the transaction remain suspicious of the transaction, and the two sides are hostile to each other. Such a relationship cannot achieve a harmonious atmosphere, let alone a harmonious transaction relationship. This will cause both parties to increase security measures and increase expenditure during the transaction process. * Small Numbers: Because the number of the two parties is not equal, the number of available transaction objects is reduced, and the market will be dominated by a few people, which leads to higher market expenditures. The main reason here is that some deals are too proprietary. * Information Asymmetric: The pioneers in the market will control the direction of the market, and will know the information that is more beneficial to their own development earlier, and often these information will make opportunists and uncertain environments finalized, which will form a unique information gap. so as to form a transaction and obtain a profit * Frequency of exchange: Frequency of exchange refers to buyer activity in the market or the frequency of transactions between the parties occurs. The higher the frequency of transactions, the higher the relative administrative and bargaining costs. * Asset specificity: Asset specificity consist of site, physical asset, and human asset specificity. The asset specific investment is a specialized investment, which does not have market liquidity. Once the contract is terminated, the asset specific investment cannot to be redeployed. Therefore, a change or termination of this transaction will result in significant loss. * Uncertainty: Uncertainty refers to the risks that may occur in a market exchange. The increase of environmental uncertainty will be accompanied by the increase of transaction cost, such as information acquisition cost, supervision cost and bargaining cost. * Threat of opportunism: Threat of opportunism is attributed to human nature. Opportunistic behavior of vendors can lead to higher transaction coordination costs or even termination of contracts. A company can use governance mechanism to reducing the threat of opportunism.See also
* Diseconomy of scale * Economic anthropology * Ronald Coase * Herbert A. Simon * Oliver E. Williamson * Opportunity Cost * Interaction cost * Market impact * Property rights (economics) * Switching costs * Theory of the firm * The Nature of the Firm * Transaction cost accounting * Vertical integrationNotes
References
* North, Douglass C. 1992. “Transaction costs, institutions, and economic performance.” San Francisco, CA: ICS Press. * *Coggan, Anthea; van Grieken, Martijn; Jardi, Xavier; Boullier, Alexis (2017). "Does asset specificity influence transaction costs and adoption? An analysis of sugarcane farmers in the Great Barrier Reef catchments". ''Journal of Environmental Economics and Policy''. 6 (1): 36–50. doi:10.1080/21606544.2016.1175975.