Transaction cost

In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange. For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal. Or consider buying a banana from a store; to purchase the banana, your costs will be not only the price of the banana itself, but also the energy and effort it requires to travel from your house to the store and back, and the time waiting in line, and the effort of the paying itself; the costs above and beyond the cost of the banana are the transaction costs. When rationally evaluating a potential transaction, it is important not to neglect transaction costs that might prove significant.

IT's relationship to transaction costs

Implementing a new information technology is generally seen as a means for reducing the transaction costs of an organisation. However, in practice, implementing a new IT often results in higher transaction costs. This is because the amount of information that need to be processed by the organisation increases. This can result in information overload. Antonio Cordella (2001) calls the cost of processing this information coordination cost. If these costs exceed the benefits of IT, then the implementation becomes something negative and expensive.

Related Topics:
Information technology - IT - Antonio Cordella - Coordination cost

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To reduce coordination costs, organisations can do one of two things:

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• Improve information processing capabilities. This can be done either through implementing new information systems or creating lateral relations (Galbraith 1973).
• Use IT to reduce the need for coordination through increased slack resources (which reduces the need for extreme precision) or increased reliance on self-contained tasks which provides more of the information to a single point of contact rather than requiring communications and coordination among multiple units (Galbraith 1973). The decreased amount of information to process means lower coordination costs and lower transaction costs.

Technologies like enterprise resource planning (ERP) can provide technical support for these strategies.

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