Transaction Costs: Why Is the Price Not the Whole Cost of Exchange?

Transaction costs are the costs required to make an exchange happen and to have it carried out, beyond the price of the good or service. They can include the time, attention and resources spent finding another party, checking information, negotiating terms, completing payment and ensuring an agreement is honoured if a dispute arises.

Consider selling a used phone. The sale price is only the visible figure. The seller must also take photos, answer enquiries, judge whether a buyer is credible, arrange handover and bear the risk of a no-show or failed payment. If those costs become high enough, a deal with an attractive price may still not be worthwhile.

Transaction cost is not the same as opportunity cost, which concerns the best alternative forgone by choosing the exchange. Nor is it switching cost, which is the extra burden of moving from an existing arrangement to another one. Transaction costs concern how an exchange is found, agreed and secured. Their importance is that institutions, platforms and continuing relationships often create value not merely by lowering prices, but by reducing the friction that makes cooperation possible.