transaction
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Transaction
Trade
In modern finance, trade especially refers to trade on securities exchanges. For example, the sale of a stock from one investor to another is known as a trade. This type of trade is regulated by special agencies in the appropriate jurisdiction; trade in the United States is regulated by the SEC, among other organizations. See also: Countertrade, Free trade, Protectionism.
transaction
transaction
the exchange of an INPUT, GOOD, SERVICE or ASSET between two or more individuals or firms. Transactions can take place on an ‘arm's length’ basis, with individuals and firms buying and selling through a MARKET, or transactions may be ‘internalized’ and conducted through an internal ORGANIZATION, involving exchanges between the various departments/divisions of a VERTICALLY INTEGRATED firm (or DIVERSIFIED FIRM or MULTINATIONAL ENTERPRISE).Transactions have a number of characteristics, which have an economic significance, including their ‘size’ (e.g. the transfer of a single item or large number of items), their ‘frequency’ (e.g. transfers may occur on a ‘one-off basis or may occur continuously, daily or weekly), and their ‘complexity’ (e.g. transfers may be relatively simple or highly technical and sophisticated).
The specification of transactions and the terms of exchange (e.g. prices to be paid) are usually incorporated into a legally binding CONTRACT between the parties involved when transfers take place through the market.
Transactions are conducted within the firm through established procedures and protocols governing input procurement, production, distribution and marketing. Typically, a system of internal TRANSFER PRICES is used to value interdepartmental exchanges of inputs, goods and services.
A key focus of modern theories of the firm and markets are the determinants of the relative efficiencies of conducting transactions through the market or within the firm. A number of considerations are relevant to this issue:
- the relative costs of transactions through the market compared to within the firm per se (see TRANSACTION COSTS);
- the importance of transaction costs vis-a-vis the firm's total supply costs (production and selling); and
- strategic considerations such as controllability of inputs. For example, the transaction costs of using the market may be substantially higher than transactions within the firm arising from the need to find suitable external input suppliers and distributors and draw up and monitor contracts with them. Superficially, this would indicate that an internal organization is preferable to using the market. However, the ‘savings’ on transaction costs may be offset by higher internal administrative costs and AGENCY COSTS.
transaction
The EXCHANGE of an INPUT, GOOD, SERVICE or ASSET between two or more individuals or firms. Transactions can take place on an ‘arm‘s-length’ basis, with individuals and firms buying and selling through a MARKET, or transactions may be ‘internalized’ and conducted through an internal ORGANIZATION, involving exchanges between the various departments/divisions of a VERTICALLY INTEGRATED firm (or DIVERSIFIED FIRM or MULTINATIONAL COMPANY).Transactions have a number of characteristics that have an economic significance, including their ‘size’ (e.g. the transfer of a single item or large number of items), their ‘frequency’ (e.g. transfers may occur on a ‘one-off basis or may occur continuously, daily or weekly), and their ‘complexity’ (e.g. transfers may be relatively simple or highly technical and sophisticated).
transaction
The specification of transactions and the terms of exchange (e.g. prices to be paid) are usually incorporated into a legally binding CONTRACT between the parties involved when transfers take place through the market.Transactions are conducted within the firm through established procedures and protocols governing input procurement, production, distribution and marketing. Typically, a system of internal TRANSFER PRICES is used to value interdepartmental exchanges of inputs, goods and services.
A key focus of modern theories of the firm and markets are the determinants of the relative efficiencies of conducting transactions through the market or within the firm. A number of considerations are relevant to this issue:
- the relative costs of transactions through the market compared to within the firm per se (see TRANSACTION COSTS);
- the importance of transaction costs vis-à-vis the firm's total supply costs (production and selling); and
- strategic considerations, such as controllability of inputs. For example, the transaction costs of using the market may be substantially higher than transactions within the firm, arising from the need to find suitable external input suppliers and distributors and to draw up and monitor contracts with them. Superficially, this would indicate that an internal organization is preferable to using the market. The ‘savings’ on transaction costs, however, may be offset by higher internal administrative costs and AGENCY COSTS.
Moreover, these savings may be small relative to the firm's total operating costs, which might then be inflated by having to undertake uneconomic operations. For example, if a firm undertakes self-supply of inputs, its own needs for these inputs may be too small to generate cost savings available to outside specialist suppliers through exploiting ECONOMIES OF SCALE. Thus, any savings on transaction costs would be more than offset by higher (self) production costs (see MAKE OR BUY). This said, it may be more advantageous strategically for a firm to become its own input supplier despite higher internal production costs, so as to have full control of a vital input rather than risk being ‘held to ransom’ by powerful outside suppliers. See INTERNALIZATION, ASSET SPECIFICITY, ASYMMETRICAL INFORMATION, MORAL HAZARD, ADVERSE SELECTION, OUTSOURCING.