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The Elgar Companion to Transaction Cost Economics

The Elgar Companion to Transaction Cost Economics

Elgar original reference

Edited by Peter G. Klein and Michael E. Sykuta

Since its emergence in the 1970s, transaction cost economics (TCE) has become a leading approach in the research on contracts, firm organization and strategy, antitrust, marketing, inter-firm collaboration and entrepreneurship. With contributions by leading scholars in economics, law and business administration – including Oliver E. Williamson, recipient of the 2009 Nobel Prize in economics for his development of the transaction cost approach – this volume reviews the latest developments in TCE and applies them to contemporary theoretical and empirical problems.

Chapter 11: The Costs of Exchange

Alexandra Benham and Lee Benham

Subjects: economics and finance, industrial economics, industrial organisation


1 Alexandra Benham and Lee Benham What determines what goods and services are traded on markets and therefore priced? What determines the flow of real goods and services and therefore the standard of living? (Ronald Coase, 1999) The law of one price is a fundamental assumption in economics. It states that in a competitive market all individuals face the same price. Our thesis here is that if the appropriate price is measured, different individuals often face different prices for the same good, even in a competitive market. These price variations affect what is produced and what exchanges take place in and out of the market, which organizations and specialties survive, and which rules of the game persist. What is the appropriate price? Consider an individual making choices based on prices and budget constraints. The relevant price the individual faces is the full set of opportunity costs associated with those choices, including the prices of the goods themselves plus the transaction costs of obtaining the goods. Even if the money price of a particular good varies little across individuals, the opportunity cost of engaging in the transaction to obtain the good often varies substantially. This opportunity cost will be affected by the individual’s personal knowledge, personal network, transaction skills, time costs, location, organization, institutional setting, and so on. Only in very exceptional cases will all active participants in a transaction face identical opportunity costs. And even more rarely will all potential participants face identical opportunity costs. Definitions of costs Transaction costs...

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