Question

In addition to technology and cross-trader competition, transaction costs have been reduced because of....

Answer 1

Transaction cost can be defined as a cost that is incurred while doing an economic trade when a buyer and seller participates in a market .The first very incident of reduction of transaction cost led to the evolution of economic markets in the human history . This event was characterised by the acceptability of money as a medium of exchange which reduced the problem of barter system. The barter system led to a common problem of finding someone where both the buyer and the seller are having common choices of sale and purchase of a certain good and created a major problem of divisibility and evaluation of the goods that were being exchanged leading to high transaction costs in the market. By accepting money as the medium of exchange the buyers and sellers can buy whatever they want and sell whatever they want, promoting greater trade and wealth.

Eliminating transaction cost makes the economy more efficient and trade more easy without creating extra cost for the parties doing the trade. The most important factor that led to to high transaction cost was barrier to communication where the banks offered the role of the middleman and created information linkages for both buyers and sellers. With the development of Internet and telecommunications, it has become easier for the buyer and seller to reach out to each other which helps to eliminate high transaction cost.

The creation of value chain industries such as Amazon has led to a significant decrease in the transaction cost as disintermediation of old middleman and reintermediation of new middle linkages have allowed the suppliers and business partners to offer the products at much lower cost . As the purchasing transaction cost have become very Low and the removal of intermediary steps for reaching the buyer have become significantly less, thus the company is able to sell higher quantities due to potential price advantages . In addition to this, increase in opportunities for integration and low Entry barriers including lower setup cost and increased flexibility of choosing partners with lower switching cost have facilitated lower transaction costs in the market.