Transaction Cost in Economics

Abstract

This chapter will set out to explain economists use the concept of a transaction cost. Central to the concept of transaction costs is the field of study that is called transaction cost economics (TCE). It is important to recognize, however, that TCE treats transaction costs in a different manner than this book does. From the title of the study, one might think that TCE is all about measuring and minimizing transaction costs, but this would be quite misleading. TCE does not even deal with transactions and transaction costs per se, as this book has been proposing, but instead addresses the purely economics-oriented question of how governance structures are selected to counter opportunistic behavior. Here governance structures refer to whether a company manufactures internally, manufactures within its family group, vertically integrates, or buys from the market.