Examples of transaction costs: theory, forms and types

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

We are aware of the costs that directly affect the final cost of production. The company buys raw materials, hires people, provides workers with materials and technologies in order to get the final product, the final cost of which will include all production costs. But there is another separate type of expenses, without which a company can hardly do without in the modern market. These are the so-called transaction costs.

Theoretical concept

Let's consider an example of the formation of transaction costs. They are not directly related to the production process and do not relate to materials or wages. But they must also be taken into account when pricing.

According to economic theory, transaction costs (we will consider examples below) are the costs that ensure the transfer of property rights from one hand to another inproduction process time. It is very difficult to understand the theoretical material. But the example of transaction costs is very simple.

Let's say there is a company "H", which produces ice cream. The company already has everything: raw materials (milk, fruit additives, sugar, etc.), workers, technology and equipment. But there is no ready room where the whole process will take place.

In this example, the company's management needs to find someone who will lease the premises, who will make repairs in it, who will install the equipment as soon as possible. That is, at least you need to find three more contractors and conclude contracts with them. Of course, the company "N" can build a building for itself, make repairs in it and connect conveyors, but it will take so much time that the summer season may already be over. In this case, we are talking about an example of transaction costs, when the company "N" transfers its powers and rights to a third party, but at the same time protects them thanks to a written agreement.

Types of transaction costs

In the field of market relations, there are five examples of transaction costs in an enterprise:

• expenses associated with searching for information;
• losses during negotiations and conclusion of contracts;
• costs of the process of measuring some quantity;
• expenses for protecting property rights;
• costs of opportunistic behavior.

Expenses of searching for information

Consider a simple example of the transaction costs of searchinginformation. Again, take the company "H", which produces ice cream. The first batch of sweet treats is already ready, but who will sell it to? The entire population of the nearest small town has already fallen in love with the ice cream of the company "Z" - "Green" and does not want to change it to "N" - "Natalkino". Firm "H" has to look for potential buyers. The management travels to another city 100 km away, spends money on gasoline or tickets, monitors the market, studies the needs of people, their preferences, etc. As a result, Firm N finds buyers, but money and time were spent on finding them.

The same thing could have been done easier. Entrust the marketing company with a part of their rights and conclude an agreement according to which the contracting company undertakes to conduct a marketing research of the consumer market in order to determine the volume of future demand. All costs for the contract with the marketing firm would be considered transaction costs.

Costs of negotiating and contracting

Let's consider an example of the formation of transaction costs, when firm "H" has already found a contractor for itself - marketing agency "A". But the second was not satisfied with the initial price, and they ask the employer for a large amount of remuneration. Company "H" is not ready to pay more, and lengthy negotiations are underway, the contract is not signed, production is idle, ice cream is not sold. This is another item that in accounting will refer to the columntransaction costs.

Measurement costs

This type of cost is related to the quality control of manufactured products. On ice cream, this is not so noticeable, since the goods must be standard and comply with state standards. But in such a field as the automotive industry, mechanical engineering, the appearance of marriage at any stage can lead to the loss of huge amounts of money. Such an example of the formation of transaction costs best describes the essence of the cost of measurement.

To eliminate marriage, you need to devote a lot of time at each stage to checking the compliance of details.

Cost of specification and protection of property rights

Let's take an example from the life of transaction costs. Let's say one person invented a completely new technology for making ice cream, which can save on water and electricity. This person works as a creative director in our company "N". Not having time to patent the idea, we introduce it into production. But our company turned out to be a spy who passed secret data to competitors. And now Firm Z is also using our technology.

There is an argument. To protect their rights and their idea, Form "H" files a lawsuit with a claim for information theft. All costs incurred by the company "H" for obtaining a patent and going to court will be charged to the column of transaction costs.

Costs of opportunistic behavior

At first glance it seems that it is very difficultconcept. But the example of transaction costs in an enterprise is familiar to almost everyone. The question concerns the main and contracting organization, when one of the parties does not want to perform the functions prescribed by the contract. The reasons for this are banal: we will take the money, but we will not do anything, or we will do it poorly. This happens all the time. The firm orders the construction of the building, and the contractor, having taken the money and pulled out the foundation pit, evaporates in an unknown direction. There are costs, but no work. This is called opportunistic behavior, that is, dishonest, dishonest attitude to the terms of the contract.

Classification according to O. Williamson

Examples of transaction costs can be divided into two categories: frequency of transactions and asset specificity.

One-time or easiest exchange on the market with unknown sellers and buyers. This process is performed by each of us almost daily. Let's say you need batteries. You go to the store and buy batteries, and next time you go only when they run out again. The seller does not care who to sell to, and the buyer does not care who to buy from. A similar situation occurs with any small household items.

When it comes to expensive equipment, there will no longer be a one-time deal. The buyer will carefully choose, look closely, ask the price before making a choice.

Recurring exchange

In this type of exchange, assets have no specific features. But there is already consistency. For example, you buy milk from the same seller every day. You know that his product is of good quality, you are satisfied with the price, and you come back again and again. Thus, we see an example of reducing transaction costs.

If there is one and the same seller, then there is no need to run around and look for others, and even discounts are given to regular customers. Therefore, it is more profitable to conclude reusable deals with trusted partners.

For the same purpose, supermarkets come up with bonus or accumulative cards. Having a good discount in one supermarket, the buyer will not run to others, and the store will get a regular customer.

In business, two things are important:

• find a reliable seller;
• keep a loyal customer who will become permanent.

If a company has a circle of regular customers who make a profit, then there is no need to look for others. Thus, there is an example of a reduction in transaction costs on the part of the manufacturer.

Recurring contract related to investments in specific assets

Specific assets are funds used to achieve a specific goal. Such a deal is updated every time it is concluded, and a certain amount of money is allocated for it.

Let's consider an example. Let's say firm "H", which produces ice cream, needs to build a workshop. She hires a contractor and they draw up a contract. Target funds are allocated for construction. When the workshop is already built, the company will use it for that purpose, forwhich it was erected, that is, to work in it. If the company wants to do something else in the workshop, for example, rent it out as a warehouse, then it will incur additional costs, which will be absolutely unprofitable for it.

Investing in unique, exclusive assets

In this case, assets are considered, in the alternative use of which their value is lost altogether. Most often, this category refers to monumental structures that were built for specific purposes. For example, a metal smelter built a blast furnace. What to do with it, except how to melt metal in it? Nothing. It is not intended for other purposes.

Factors affecting the growth of transaction costs

This includes:

• the presence of bureaucratic red tape in the preparation of contracts;
• barriers to market entry;
• the presence of a large number of sellers, the quality of which is unknown;
• presence of opportunistic behavior;
• high cost and inaccessibility of information;
• specially created difficult conditions for the functioning of the market due to ill-conceived policies;
• poor management of the firm;
• high risks.

Transaction costs are associated not only with the loss of finances. In many cases, there is a cost of time and human resources.

An example of reducing transaction costs in Russia is the development of outsourcing.

Outsourcing: a method to reduce transaction costs

The concept of outsourcing means the transfer by the customer firm of sometheir functions to an outside organization on the basis of an agreement. In this case, the partner firm must be an expert in its field and have a reliable reputation.

The most common example of outsourcing is bookkeeping. It is unprofitable for small firms to hire a separate person, pay him a salary, plus the awkwardness with a vacation: who will keep records when the accountant leaves to rest? To avoid embarrassing situations and save on the whole division, it is more profitable for a company to turn to a third-party accounting firm.

Types of outsourcing:

• IT outsourcing is about maintaining computers, creating websites, programming, installing software.
• Production. Transfer of part of production functions. For example, using the services of a carrier company, delegating components assembly to another company.
• Management outsourcing involves the recruitment and training of staff by a third party agency.
• Transfer of secondary functions such as accounting, marketing and advertising, logistics.

Outsourcing helps companies save time, money and labor where high costs can arise by focusing only on the core production process. It is effective for businesses large and small, regardless of the degree of we alth and type of ownership.