Transaction Cost Theory

[Date of Submission]

Introduction3

Discussion3

Concept dimensions4

Quantity of transaction costs5

Determining factors6

Opportunism and bounded rationality6

Transactions and features7

Conclusion11

The Transaction Cost Theory

Introduction

In accordance with the claims of the Neo-institutional economics, it is considered that the transaction costs theory was initiated by Ronald Coase. One of Ronald's articles, published in 1937 and known as 'Nature of the Firm', highlighted the development of a brand new theory of the firm. The process was initiated through observation. This is known to most economists as the co-ordinated system of economics with the mechanism of price (Verbeke & Kano, 2012). He portrayed the firms existing at the time as the 'islands of conscious power in this ocean of unconscious co-operation'.

This cost is considered to discovery of relevant price. In addition to that, it is also known to be the negotiation costs, which concludes separate contracts for each and every transaction of exchange, which is likely to occur within the market. In accordance with Coase, this is a type of the cost of transaction. It is highly important to note that the market resorting is supposed to be a process of gathering critical information as well as the processes of coordinating different transactions, which are more than likely to be extremely complex as well as costly. Under certain events, the development of the organization is done as a feasible alternate supplying, through its structures of hierarchy, the structures of the market in the allocation of resources.

It is of critical significance to realize that it was not the intention of Coase to alter the economic theory profile. His personal objective was the introduction of the cost of transactions, which would explain the emergence of the firms. In addition to that, Coase did not aim at over emphasizing the notion.

Discussion

Concept dimensions

As it is importantly highlighted above, the cost of transaction originated because of the innovation of the concept of Ronald, in which functioning of the market portrays particular costs. These are known as cost of transactions. It is highly imperative to realize that these are the actual costs of operating the entire economic system.

However, in transaction costs are not particularly defined in specialty literature. The specialty literature generally defines the costs of transaction, in accordance with their components. Thus, there are various interpretations, which share common backgrounds, but may differ from each other a little as defined by different authors (Rugman & Verbeke, 1992). But, one of the current classifications managed to portray two separate definitions of the costs of transactions. These are associated with exchanges done within the market and are in indebted to Coase.

The major focus has been on the activities of exchanging and more specifically the emphasis is focused on the collection of exchange information. This, however, has equated the cost of gathering information and the costs of transactions. But, even then, both the concepts are not identical to each other. The cost of information is considered to be one of the features of the cost of transaction.

It has been explained by Thrainn Eggertsson that a person, who ...