Question

In Strategic management, what are transaction cost and what decisions do transaction cost enable us to make and can transaction cost exist within a firm?

Answer 1

Transaction costs are costs incurred that don’t accrue to any participant of the transaction. They are sunk costs resulting from economic trade in a market. In economics, the theory of transaction costs is based on the assumption that people are influenced by competitive self-interest.At the highest level, only markets exist, and people in the economy are free to enter into contractual agreements with each other. Under such a viewpoint, the company exerts full control over the contract, which led economists to believe that contracts would be violated by different parties when they find an opportunity to do so. The aim of the transaction cost was to limit the authority of contractual relationships.Transaction costs in economies aim to clarify why some markets are able to accommodate many organizations while others are dominated only by a few, which are known as hierarchies. Oliver E. Williamson, who won the Noble prize for Economic Science in 2009, made an argument for the transformation of economies based on small transactions into one made of large hierarchies that transact among themselves.