Transaction Costs and Information Technology

Definition of Transaction Costss

Transaction costs are disbursals of trading with others beyond the worth. Transaction costs are the costs that are incurred apart from the production cost and incurred when doing an economic exchange takes topographic point.

Coase contends that without sing dealing costs, it is impracticable to understand the proper working of the economic system. Transaction costs are by and large defined as:

  • costs of garnering information
  • negotiating costs
  • measuring option options
  • cost of physical dealing
  • cost of uncertainness related

Coase ” „?s part was to concentrate on the overhead cost of seeking, bargaining, and regulating exchanges of value. He reasoned that when dealing costs are low, markets would organize and happen great monetary values, but the high dealing costs would be a predictor of market dislocation. Arrow defined dealing cost, – ” as the costs of running the economic system. “ A? Barzel defined it as – ” the cost associated with the transportation, gaining control, and protection of rights. “ A?

Transaction costs are accepted as the hub of the new institutional theory of organisations by Groenewegan. In perfect markets, dealing costs would be zero. However, the existent universe is non where information is perfect and hence certain cardinal factors lead to the being of these costs. The cardinal environmental factors are uncertainness, frequence, plus specificity, and figure of houses along with human factors such as delimited reason and self-interest.

Bounded reason: Is the limited human capacity to anticipate or decide complex jobs. It is behaviour that is meant to be rational merely in a limited manner and involves cognitive and perceptive restrictions and linguistic communication restrictions. Worlds have limited memories and limited cognitive treating power to incorporate all the information we have and absolutely work out its effects, as there are many options and rival actions are unpredictable.

Opportunism: Includes guile in pursuit of one ” „?s ain involvements. It refers to the possibility that people will move in a self-interested manner with intelligence as they would non be wholly honorable and true about their purposes and would desire to take advantage of working another party when possible by mentioning to incomplete or distorted information.

Uncertainty and frequence: Minutess can be frequent or rare, have high or low uncertainness, and affect specific or non – specific assets.

Asset specificity: This relates to the range of value of a good or service. It refers to the extent to which non – fungible assets are tied to peculiar minutess specified by contracts and committedness. For case, a house in LA is site specific to that peculiar location, a batch of Christmas trees is clip specific, loyal clients of Coke are trade name specific, etc.

Number of houses: Higher figure of houses leads to higher uncertainness.

Role of Information Technology on Transaction Costss

Information Technology refers to electronic processing, storage and communicating of information. By dealing costs, are meant the amount of production cost, the attempt, and cost incurred to happen and negociate for the goods. Transaction costs include both internal and external coordination costs every bit good.

Information engineering has obscure effects on overall dealing costs. IT externalities have both positive and negative effects on coordination and dealing costs. Galbraith ( 1977 ) argues that larger the vagueness of undertaking, higher is the sum of information that must be processed between determination shapers during executing of undertaking to accomplish a degree of public presentation.

Therefore, in general, IT is seen as a powerful tool that can cut down the costs of transacting by giving more information to determination shapers. This consequences in cut downing uncertainness and bettering the operation of the market. ( Ciborra 1993 ) . Harmonizing to Malone et Al,

communicating ( increased information flux per minute )

electronic integrating consequence ( easier linkage between purchaser and marketer )

electronic securities firm consequence ( undertaking the procedure between marketer and purchaser

becomes efficient and effectual )

Lewis argues, – ” Professional and personal endurance in modern society clearly depends on our ability to take onboard huge sums of new information. Yet that information is turning at an exponential rate. “ A? With the acceptance of IT, a figure of communicating channels drastically increase. IT webs are organized so that the figure of possible interactions is about limitless and cost of interaction is negligible. ( Fowler 1997 ) .

However the beliing position to this theory states that the use of IT leads to more information which may take to information overload, taking to higher processing costs taking to higher TC. If information available would be reduced, complexness would worsen taking to take down coordination and dealing costs. ( Palme 1984 ) .

However this market efficiency of excessively much information could be fixed by expeditiously back uping the IT by bettering information processing capablenesss and cut downing the figure of organizing activities which don ” „?t contribute to the value of the organisation. Further, houses could cut down this uncertainness by better planning and coordination, frequently by organizing regulations, hierarchy or ends. The above mentioned views/strategies can non be substituted but could co – exist.

The theory of institutional economic sciences provinces that increasing the complexness of minutess will ensue in the failure of the coordination mechanisms within a market because TC will be excessively high. Therefore as exchange related complexness additions, it becomes more efficient to utilize IT.

Therefore, to reason, on one manus IT gives more and better information, doing communicating easier and on the other manus, increased sum of information has to be processed in order to organize the organisational activity, hence, it can ensue in lower or higher coordination costs to the organisation.