transaction costs

Transaction Cost

The total cost of a security transaction after commissions, taxes, and other expenses. For example, a security has a price, but transaction costs include the fee one must pay the broker, capital gains taxes, among other things.

transaction costs

The expense incurred in buying or selling a security. Transaction costs include commissions, markups, markdowns, fees, and any direct taxes. Transaction costs, which are of special significance to investors who frequently trade securities, can vary substantially depending upon the firm with which the investor conducts business. See also discount brokerage firm.

transaction costs

the costs associated with the activities of buying and selling in a MARKET system (see TRANSACTION). For example, firms incur costs in finding satisfactory input suppliers and distributors for their products and in negotiating, concluding and monitoring CONTRACTS with other firms. In some market situations, transaction costs may be inflated by the application of monopoly surcharges by powerful suppliers. Although a firm may avoid some transaction costs by VERTICAL INTEGRATION (i.e. performing some functions internally), these may well be offset by the higher administrative, stockholding and other costs involved in running a vertically integrated business. See AGENCY COSTS.

transaction costs

the costs incurred in the EXCHANGE of an INPUT, GOOD, SERVICE or ASSET between two or more individuals or firms. TRANSACTIONS can take place through a MARKET, which involves the ‘arm‘s-length’ buying and selling of inputs, goods, services and assets using the PRICE SYSTEM, or transactions may be ‘internalized’ through an internal ORGANIZATION, which involves the interchange of inputs, goods, services and assets between the various departments of a firm, often using an internal TRANSFER PRICING system.

The transaction costs of using the market include the ‘search’ costs of finding suitable input suppliers and distributors for the firm's output, the administrative and legal costs involved in drawing up CONTRACTS with suppliers/distributors, specifying terms and conditions of supply/delivery the costs of‘monitoring‘whether or not the terms and conditions of the contract have been adhered to, and the costs of dealing with non-compliance (e.g. the return of defective components). Where a firm deals with a multitude of suppliers/distributors, this takes up management time as well as involving substantial ‘policing’ costs. In addition, the firm may be faced by powerful input suppliers and distributors who are able to impose monopolistic surcharges on the terms of exchange and/or operate PRICE SQUEEZES, REFUSALS TO SUPPLY, etc.

For these reasons, a firm may seek to eliminate external transaction costs by engaging in self-supply of inputs and self-distribution of its products, thus substituting an internal organization for the market. It is important, however, to emphasize that the elimination of external transactions does not represent a ‘pure’ saving. By ‘internalizing’ transactions, the firm now incurs extra internal expenses - the greater administrative costs of running an enlarged operation - and it may encounter ‘agency’ problems (see AGENCY COSTS). See TRANSACTION for further discussion.

The Coase theorem suggests that the decision by a firm to use markets to undertake exchanges rather than to internalize such exchanges will be determined by the amount of transaction costs involved in undertaking any specific exchange. See INTERNALIZATION, OUTSOURCING.

References in periodicals archive ?
Generally, transaction costs related to property purchases are capitalized.
He also informed that many discussions were held with various stakeholders and finalized the report suggesting measures to reducing transaction costs and time impacting the country's foreign trade.
Transaction costs of taxes and regulations disrupt the fair distribution of goods and services.
Among his specific points of departure from the mainstream, he holds the view that economists' preoccupation with studying the logic of optimal choice has caused them to neglect the study of the institutional setting in which choice takes place and that this has eroded the substance of economic research, that human action cannot be adequately characterized as a constrained optimization problem, and that modern economic theory ignores the role of transaction costs (Coase 1988: 3-7).
Bernard submitted a letter to Assistant Secretary of the Treasury for Tax Policy Eric Solomon and Acting IRS Commissioner Kevin Brown relating to the treatment of transaction costs incurred in connection with the acquisition, creation, or disposition of a trade or business in a taxable or tax-free stock or asset transaction.
Most states have provisions for "detachment" from the municipal corporation, but few detachments have occurred over the years, due in part to the high transaction costs associated with getting the state government's approval.
The purpose of this paper is to estimate transaction costs on the Tunisian Stock Exchange (TSE).
Content is designed to offer commentary, analysis and advice on institutional investing and carries articles and features on: reviewing and measuring trade execution performance, pre- and post-trade analysis and transaction cost analysis, commission allocations and trading strategies, and controlling transaction costs.
With a house, for example, the transaction cost may be 4% to 6%, while transaction costs for stocks and bonds may be 1% to 2%, he said.
While exploring possibilities for selling access to articles on the Web, I came up with what appears to be a remarkable way to charge even very small amounts of money online, almost eliminating transaction costs and encouraging supporters to share paid access.
In addition, the enhanced solution can lower transaction costs and significantly reduce the upfront efforts needed to enable suppliers.
We take an initial look at the industry, and highlight how these changes influenced transaction costs in the defense industry, more fully explain the forces driving consolidation, and provide greater insight to policy makers seeking to improve the performance of the defense industry.

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