Transaction costs

Transaction costs are the costs incurred in order to carry out a market transaction.

Transaction costs

The concept of transaction costs was first developed by Nobel laureate Ronald Coase, who wondered why companies exist. According to Coase, transaction costs are the costs associated with using the market price mechanism and companies are created in order to reduce these costs.

Types of transaction costs

Among the types of transaction costs are:

  • Search costs: The costs associated with finding the suppliers of the good or service we need. Investigate their suitability, reliability, availability, and pricing.
  • Hiring costs : These are the costs of negotiating and drafting contracts. To which the costs of verifying compliance with the agreement are included.
  • Coordination costs : It is the cost of organizing and coordinating the different inputs or processes that are required to obtain the desired good or service. Within these costs are the costs of communication, transportation, etc.

The relationship between transaction costs and company size

According to Coase, the company and the market are alternative means of economic organization. In the market, goods and services are traded in a decentralized manner. In the case of the company, on the other hand, it is determined internally which transactions are carried out and a hierarchical organization system is established.

Thus, for example, a designer can sell his services independently in the market or he can be part of the staff of a company, dedicating himself exclusively to it.

Companies exist because using the market mechanism involves costs, so companies are a more efficient way to organize resources and reduce the costs of carrying out each transaction.

How long will a company grow? The business will grow until the costs of organizing an additional transaction internally equal the costs of acquiring it on the open market.

Companies do not grow unlimited since organizational costs increase with size. In this way, there will come a point where it is more efficient to use the market mechanism.