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Transaction cost for Organisational Theory and Behaviour Mcom sem 1 Delhi University

Transaction cost for Organisational Theory and Behaviour Mcom sem 1 Delhi University

Transaction cost for Organisational Theory and Behaviour MCOM sem 1 Delhi University:- we will provide complete details of Transaction cost for Organisational Theory and Behaviour MCOM sem 1 Delhi University in this article.

Transaction cost for Organisational Theory and Behaviour MCOM sem 1 Delhi University

Transaction cost for Organisational Theory and Behaviour MCOM sem 1 Delhi University

Transaction cost for Organisational Theory and Behaviour Mcom sem 1 Delhi University

In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market.

In Transaction Costs, Institutions and Economic Performance (1992), Douglass C. North argues that institutions, understood as the set of rules in a society, are key in the determination of transaction costs. In this sense, institutions that facilitate low transaction costs, boost economic growth.

Douglass North states that there are four factors that comprise transaction costs – “measurement,” “enforcement,” “ideological attitudes and perceptions,” and “the size of the market.” Measurement refers to the calculation of the value of all aspects of the good or service involved in the transaction. Enforcement can be defined as the need for an unbiased third party to ensure that neither party involved in the transaction reneges on their part of the deal. These first two factors appear in the concept of ideological attitudes and perceptions, North’s third aspect of transaction costs.  Ideological attitudes and perceptions encapsulate each individual’s set of values, which influences their interpretation of the world. The final aspect of transaction costs, according to North, is market size, which affects the partiality or impartiality of transactions. 

Transaction cost for Organisational Theory and Behaviour Mcom sem 1 Delhi University

Transaction costs can be divided into three broad categories:

  • Search and information costs are costs such as in determining that the required good is available on the market, which has the lowest price, etc.
  • Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on. In game theory this is analyzed for instance in the game of chicken. On asset markets and in market microstructure, the transaction cost is some function of the distance between the bid and ask.
  • Policing and enforcement costs are the costs of making sure the other party sticks to the terms of the contract, and taking appropriate action (often through the legal system) if this turns out not to be the case.

For example, the buyer of a used car faces a variety of different transaction costs. The search costs are the costs of finding a car and determining the car’s condition. The bargaining costs are the costs of negotiating a price with the seller. The policing and enforcement costs are the costs of ensuring that the seller delivers the car in the promised condition.

Transaction cost for Organisational Theory and Behaviour Mcom sem 1 Delhi University

The term “transaction cost” is frequently thought to have been coined by Ronald Coase, who used it to develop a theoretical framework for predicting when certain economic tasks would be performed by firms, and when they would be performed on the market. However, the term is actually absent from his early work up to the 1970s. While he did not coin the specific term, Coase indeed discussed “costs of using the price mechanism” in his 1937 paper The Nature of the Firm, where he first discusses the concept of transaction costs, and refers to the “Costs of Market Transactions” in his seminal work, The Problem of Social Cost (1960). The term “Transaction Costs” itself can instead be traced back to the monetary economics literature of the 1950s, and does not appear to have been consciously ‘coined’ by any particular individual.

Arguably, transaction cost reasoning became most widely known through Oliver E. Williamson’s Transaction Cost Economics. Today, transaction cost economics is used to explain a number of different behaviours. Often this involves considering as “transactions” not only the obvious cases of buying and selling, but also day-to-day emotional interactions, informal gift exchanges, etc. Oliver E. Williamson, one of the most cited social scientist at the turn of the century, was awarded the 2009 Nobel Memorial Prize in Economics.

Transaction cost for Organisational Theory and Behaviour Mcom sem 1 Delhi University

According to Williamson, the determinants of transaction costs are frequency, specificity, uncertainty, limited rationality, and opportunistic behavior.

At least two definitions of the phrase “transaction cost” are commonly used in literature. Transaction costs have been broadly defined by Steven N. S. Cheung as any costs that are not conceivable in a “Robinson Crusoe economy”—in other words, any costs that arise due to the existence of institutions. For Cheung, if the term “transaction costs” were not already so popular in economics literatures, they should more properly be called “institutional costs”.  But many economists seem to restrict the definition to exclude costs internal to an organization. The latter definition parallels Coase’s early analysis of “costs of the price mechanism” and the origins of the term as a market trading fee.

Starting with the broad definition, many economists then ask what kind of institutions (firms, markets, franchises, etc.) minimize the transaction costs of producing and distributing a particular good or service. Often these relationships are categorized by the kind of contract involved. This approach sometimes goes under the rubric of New Institutional Economics.

Transaction cost for Organisational Theory and Behaviour Mcom sem 1 Delhi University:-TRANSACTION COST ECONOMICS

  The first academic discipline that addressed the role of firms from a theoretical point of view was economics. However, classic economic theory viewed the firm just as a production function, a black box that was able to (somehow) transform a set of productive factors into a set of products and services. Such an oversimplified view of the firm is appropriate to study the functioning of markets, but it proves limited for managerial purposes, since it ignores the big issues of internal coordination and motivation that distinguish firms from markets. Along the 20th Century several theories of the firm have tried to open the black box and explain the role of firms in the economy and their internal functioning.

Transaction cost for Organisational Theory and Behaviour Mcom sem 1 Delhi University

The contractual theories of the firm have their origin in the early work of Ronald Coase (1937) on the Nature of the Firm, which was expanded later on by Oliver Williamson (1975) in his path-breaking book Markets and Hierarchies. Both authors were awarded the Nobel prize in 1991 and 2009, respectively. The first of the three contractual theories is known as Transaction Cost Economics (TCE) and comes from the work of these two authors. TCE is interested in explaining why we need firms in a market economy. In theory, if markets worked perfectly we would not need any firm, since market forces would suffice to provide all the coordination and incentives needed for production activities. TCE understands the firm as a hierarchy which allocates productive resources by command (the exercise of authority). Markets would do just the opposite, by allocating productive resources using the price system (bargaining). TCE argues that in some circumstances a hierarchy (a firm) can make a more efficient allocation of resources than a market (a bargaining system). This is due to imperfections in markets such as imperfect information and bounded rationality. While theoretical economic models do not contemplate these imperfections, they are present in real markets and contribute to generate three types oftransaction costs:

  • Search and information costs: those associated with searching relevant information and meeting the agents with whom the exchange will take place. The stock exchange, for instance, is a very efficient financial institution that emerges from the inability of markets to costlessly make buyers and sellers of financial assets come together. Stock brokers mediate the market transactions of investors and their fees reflect the nature and importance of information costs.
  • Bargaining costs: those associated with coming to a reasonable agreement and drawing up an appropriate contract. Of course, bargaining costs are negligible in many market transactions, such as buying a newspaper. However, some other market transactions incorporate huge bargaining costs. Think, for instance, in how costly it is to negotiate the transfer of a star soccer player from one team to another.
  • Policing and enforcement costs: those related to supervising the fulfillment of the contract and make sure that the other party sticks to the terms of the contract. In a world of candid people these costs would be unnecessary. Real people, in contrast, may occasionally deviate from the terms of the contract and this is why enforcement costs are unfortunately needed to govern real world transactions. Litigation costs are the most obvious manifestation of this type of transaction costs.

According to TCE, the existence of transaction costs and the ability of entrepreneurs to minimize them when governing certain transactions explains the existence of firms within free market economies. Firms are viewed as efficient alternatives to market coordination for the government of some transactions. Furthermore, as the firm and the entrepreneur gain advantages in governing additional transactions, firms will grow and incorporate additional activity. The limits of the firm will be established by the relative ability of markets and firms to coordinate transactions.

Transaction cost for Organisational Theory and Behaviour MC sem 1 Delhi University

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