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 ?
Schachermayer presents and organizes recent developments in portfolio optimization under proportional transaction costs when lambda is greater than zero, but paying special attention to the asymptotic behavior as lambda tends to zero.
As I learnt that day, transaction costs are very important - so important that they change our basic understanding of economics.
The Securities and Exchange Commission said Thursday that it has brought an enforcement action against a Richmond, Virginia-based investment advisor for failing to properly inform clients of additional transaction costs beyond those charged in a wrap fee program.
Summary: Transaction costs in Oman are moderate, and in line with those in other GCC countries
Presently, 65% of goods consumed in Namibia are imported from South Africa which indicates that Namibians would incur transaction costs in the process of importing these goods.
of California, Berkeley, and 2009 winner of the Nobel Prize in Economics for the Studies of Economic Governance) collects 16 of his writings, penned between 1971 and 2010, which provide an overall portrait of his work in the field of transaction cost economics, which is an interdisciplinary project joining law, economics, and organizational studies and differs from economic orthodoxy by introducing positive transaction costs and working out the ramifications for governance of contractual relations.
This article discusses the tax consequences of transaction costs in four settings: in general, when acquiring or producing tangible assets, when acquiring or creating intangible assets, and when acquiring a business.
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.
This paper places a critical view on this approach based on the concept of substitution between ex-ante and ex-post transaction costs and near decomposable transaction dimensions.
The portfolio capacity analysis tool leverages ITG's Agency Cost Estimator (ACE) model to help the buy-side examine the impact of transaction costs on expected fund returns.
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).

Full browser ?