Transaction Costs

Transaction costs are the costs that occur when participating in a market. The level of transaction costs depends upon three important factors: the frequency of the transaction, the level of transaction specific investment, and the external and internal uncertainty. To use a very simple example, when buying a book, there is not only the purchase price of the book but also the costs you incur in purchasing the book, these could include your energy and effort in selecting the book, the costs of traveling to the store or using the internet, the time waiting, the effort and costs of making the payment. The costs that go beyond the books price are the transaction costs. Transaction costs include actual monetary costs, expertise, flexibility, risk, asset specificity, the cost of managing the relationship, and supplier set up and switching costs to name only a few that must be considered.

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