Transaction Cost Economics (TCE)

A transaction cost is defined as a cost incurred in making a transaction or an economic exchange. It is also often known as coordination cost. Different kinds of transaction costs that exist are:

• Search and information costs:   Costs incurred in finding the availability of the required good in the market, gathering information on the lowest priced good, etc.
• Bargaining costs:   Costs required to come to an acceptable agreement with the other party to the transaction.
• Policing and enforcement costs:           Costs of making the other party honour the terms of the contract, and taking appropriate action through the police and legal system, if required.

Transaction cost theorists tend to explain that the total cost incurred by a firm can be grouped mainly into two, namely the transaction costs and the production costs. Transaction costs include the costs of ‘all the information processing necessary to coordinate the work of people and machines that perform the primary processes’. The production costs include the costs of ‘all the physical or other primary processes necessary to create and distribute the goods or services being produced’.