Transaction costs

Transaction costs are the associated costs that derive from the formalisation of complex relationships that necessarily exist for the production of goods and services. As an example, transactions cost can occur during the processes of negotiation, search, determination of prices, etc.

Ronald H. Coase developed a theory regarding industrial organisation, and specifically business formation, in which transaction costs play a main role. In his book “The Nature of the Firm”, 1937, he explained why productive individuals find it beneficial to form coordinating agencies (firms) as a reaction to transactions costs. Instead of individuals operating independently, and repeatedly incurring in numerous transaction costs, they could work in a global framework, and at the same time they could benefit, amongst other things, from learning and experience curves and from economies of scale.