Transaction cost

Recommend this article to your friends! Transaction cost theory tries to explain why companies exist, and why companies expand or source out activities to the external environment. The transaction cost theory supposes that companies try to minimize the costs of exchanging resources with the environment, and that companies try to minimize the bureaucratic costs of exchanges within the company. Companies are therefore weighing the costs of exchanging resources with the environment, against the bureaucratic costs of performing activities in-house.

Transaction cost

See Article History Transaction cost, economic losses that can result from arranging market relationships on a contractual basis. In the field of economicsthe study of transaction costs originated from the use of aggregative social modeling and its underlying assumption of individuals operating under competitive self-interest.

At the highest level of abstraction, there are only marketsand everyone is free to enter into contractual relations with everyone else. Under this view, the firm is seen famously as a nexus of contracts.

This approach led economists to expect that contracts will be violated not occasionally but whenever the parties to them find it possible.

Emerging from these studies, transaction cost economics focuses on the limitations of contractual relationships. Transaction cost economics seeks to explain why there are some markets with many organizations in them and why there are some industries dominated by just a few large organizations—called hierarchies.

Transaction cost economics consists of four main elements: The world is uncertain and therefore unpredictable.


Small numbers bargaining and asset specificity make it costly for parties who enter into economic relationships to leave them. Individuals are limited in the information they can acquire and process and, thus, also in the number of options they can choose from.

As a result, economic transactions are based not on pure rationality but on bounded rationality. The inherent opportunism of individuals in economic relationships makes contractual enforcement over a long-term period difficult.

Together, these four factors make it difficult to contract at low costs and create frictions i.

The capitalist solution is to integrate up and down the production chain by buying out suppliers and the people one sells to. Variations in the way the four factors affect different economic relationships determine the degree to which an industry is concentrated or not. Transaction cost economics argues that the modern large firm represents a substitution of contractual relationships with an authority relationship.

Entrepreneurs who create large hierarchies no longer have to write complicated contracts but can instead use organizational tools such as incentives, coercion, and monitoring to maintain behavioral control.Capitec Bank offers the most affordable banking available in South Africa.

Learn more about Global One's transaction fees and see how much you can save. Transaction costs are expenses incurred when buying or selling a good or service. Transaction costs represent the labor required to bring a good or service to market, giving rise to entire. The Transaction Auditing Group, Inc.

(TAG) is an independent and unbiased provider of trade performance analytics and market quality assessment for the securities industry.

What are 'Transaction Costs'

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Transaction cost

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