In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange (restated: the cost of participating in a market).
Transaction costs can be divided into three broad categories:
- Search and information costs are costs such as those incurred 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.
For example, the buyer of a new car faces a variety of different transaction costs. The search costs are the costs of finding a car and determining the car's condition. The bargaining costs are the costs of negotiating a price with the seller. The policing and enforcement costs are the costs of ensuring that the seller delivers the car in the promised condition.
Read more about Transaction Cost: History of Development, Examples, Differences From Neoclassical Microeconomics
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