What Causes The emergence of Transaction Costs
The appearance of a term such as transaction costs, effective for the world of digital economy in which we live, is due to the Nobel Prize-winning economist Ronald H. Coase, and several of his famous articles (the germ is found in ‘The Nature of the Firm’). In particular, in the terminology of Coase, transaction costs would become the costs associated with the use and calculation of market price mechanism, or put another way, the costs that firms incur when, instead to use their own internal resources, leaving the market to find those products and services.
Why are there groups of people working together under one organizational framework? Why is there the market within the firm? Why is not profitable to every worker, every step of the production process to become an independent buyer and seller? Why not auction their services draftsman engineer? Why not sell the design engineer to the highest bidder?
For over sixty years, the economist Ronald Coase asked why firms exist. His reflection was aimed directly at the theory of Adam Smith’s invisible hand. Prevailing in the 30s, indicated that a decentralized price system itself managed the allocation of resources more efficient. That is, the market was the best mechanism to match supply and demand, set prices and extract the maximum value of finite resources. Economic activities could be coordinated perfectly by a price system without any coordination mechanism. Then, Coase asked why individuals did not act as independent buyers and sellers together rather than in companies with tens of thousands more workers?
Returning to his thought, and with reference to several variables such as the cost of collaboration, and the relationships between consumers, employees, suppliers, partners and competitors, said that the cost and challenges of the information, communication, negotiation and resolution of transactions between the parties are often prohibitive, and that in this situation, convention organized, logically, creating value in companies. For that, he had to rely on a management structure (management) for hierarchical decision making and execution of work.
He took the example of Henry Ford and Alfred P. Sloan, and their companies, Ford and General Motors, explaining, after transaction costs, the existence of these large companies and an organizational model that seemed unnecessary in a perfect market system, according to the ideology of the invisible hand Adam Smith
In short, he understood that there were different costs of using the price mechanism were not taken into account by the theory of his time, and they had to know how to control and centralize their management in any way. There were a few reasons, highlighting the costs of information.
In addition, the determination of prices, in some cases, may require a costly and uncertain negotiation, which would be the costs of recruitment, including recruitment of the requirements relating to the negotiation started. There are also costs of writing contracts and verify that they are being met, thinking that they will be increased if there is to do this operation every time you go to make a contract.
Finally would the costs of coordination, or the price at which it is incurred to fit the various products and processes. Also part of such costs, communications costs, more important when companies have to report that they are far apart geographically. But this also means finding and managing talent, plus the management of production processes, marketing and distribution.
The outcome will determine the most sensible thing was to play the maximum number of possible functions within the company, as he discovered Coase. For that reason, large firms were created to ease the burden of transaction costs.
Here comes an obvious question: why all companies do not come together to form a single company? With a clear answer: a great company will have more difficulty in managing resources efficiently, while small businesses will do things cheaper than large (as the passage of time has shown).
And curiously, if we take the time variable, Ronald Coase was to some extent the first to predict the changes caused by the Internet. These are associated in part to reduce the costs of collaboration beyond the limits of a company, and ultimately led to the emergence of Coase’s law.
A company will tend to expand until the costs of organizing an extra transaction within the company match the costs involved to play the same role in the open market. When you come out cheaper to make a transaction within the company, is recommended. However, if it is cheaper on the market, we should not try to do internally.
Applying and reinterpreting the law to developments in Internet use, along with the transformation of organizations by the intensive use of information technology and communications, transaction costs have plummeted. Today, companies must withdraw until the cost of a transaction internally does not exceed the cost involved to do it externally. Transaction costs remain, but under a different light. The cost is now higher in firms in the market.
Access to information for decision making is now easy and cheap to get, strongly affect the whole process of decision making. That is, when Coase analyzed the problem, he realized that the reason for a company was that it was less costly to organize under one umbrella organization to market using a system where you have to negotiate with external suppliers every part of the process want to develop, thus taking advantage of efficiencies that individuals by themselves podíann not reach. Just sixty years later, the idea has been around respecting the theory of transaction costs, but without the need for large companies.
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