Question

why do firms have differing cost structures? what did ronald coase mean by the term transaction cost?

Answer 1

Cost structure refers to the various types of expenses a business incurs, and it is typically composed of fixed and variable costs. Fixed costs are costs that remain unchanged regardless of the amount of output a company produces, while variable costs change with production volume.

Operating a business must incur some kind of costs, whether it is a retail business or service provider. Cost structures differ between retailers and service providers, thus the expense accounts appearing on a financial statement depend on the cost objects, such as a product, service, project, customer, or business activity. Even within a company, cost structure may vary between product lines, divisions or business units, due to the distinct types of activities they perform.

To maximize profits, businesses must find every possible way to minimize costs. While some fixed costs are vital to keeping the business running, a financial analyst should always review the financial statements to identify excessive expenses that do not provide any additional value to core business activities.

Transaction Cost as referred by Ronald Coase is the cost of providing for some good or service through the market rather than having it provided from within the firm.

Transaction costs are:

• search and information costs
• bargaining and decision costs
• policing and enforcement costs