Transaction Economic Cost

Transaction Economic Cost (TCE) is a transaction cost incurred in making an economic exchange. Or alternatively, a concept, which denotes the cost to using the market-such as cost of organizing and transacting exchanges--which can eliminate by using the firm. TCE argues that transactions have distinct characteristics that, in combination with the attributes of alternate governance structures, produce different production and transaction costs. These transaction cost broadly break down into motivation and coordination cost( Milgrom and Robest 1992), opportunism and agency cost( Jensen and Meckling 1976), and measurement cost (Stigler 1961). TCE argues that transactions have distinct characteristic that, in conjunction with governance structure, produce different production and transaction cost.   In general, the three main key transaction characteristics are (1) asset specificity, (2) uncertainty, and (3) frequency of transactions(Williamson 1981).

Before engaging themselves into a particular transaction, some deliberation required for these characteristics. Decision makers need to choose whichever governance structure minimizes the total cost associated with a transaction. ( Coase 1937).

Hidden opportunities and trap for the firm

Given a company that an investment entering a transaction is excessively costly for one party to develop the activities. And some market opportunities are high in uncertainty and questioning the probability the frequency transaction occur in future period.   Firm may need to reconsider some other alternative options to mitigate these weakness.

Economies of scale

Management have invested significant amount on its fixed assets. The logical approach for the firm is to achieve cost leadership. The idea is to spreading the indivisible fixed cost over an ever-greater volume of output. The capability for the firm to average out this fixed cost however   is depending on the frequency of the transactions and the certainty of the...