Transaction Costs

Transaction Costs

Exchange is a necessary thing but what makes an exchange "worth it"? According to Gwartney, Stroup, Sobel, and Macpherson (2011) "The costs of the time, effort, and other resources necessary to search out, negotiate, and conclude an exchange are called transaction costs" (p.31). Transaction costs can limit or restrict productive exchange because sometimes the enormous effort that it takes to conclude a trade may render it not worth the trouble in the end.

I am sure most people have heard the term middleman. A middleman is a sort of go-between that facilitates trade; usually charging a fee for their services. Examples would be a grocer, car dealership, or a stock broker. Gwartney et al. (2011) stated that although being a middleman is often seen as a negative thing because it is generally thought that dealing with a middleman only raises the buyer's expense, middlemen actually lower transaction costs by providing information to both buyers and sellers (p.32). The information that they share is at a lower cost, and they can help arrange trades more efficiently. The Merriam-Webster dictionary tends to agree with the view that a middleman increases transaction costs as it stated that "The Internet helps consumers save money by buying products directly from companies and eliminating the middleman".

A few years ago, I took the position of a middleman by purchasing odds and ends goods from discount stores and selling the products at a higher price to buyers on the internet auction site eBay.com. Although I had planned this venture to earn extra money to put aside for my son's car, it did not pan out very well. I quickly found out that for me, the transaction costs were so high, that I was actually losing money! It took hours and hours to travel to and shop through various stores for the goods. There were also many fees charged by eBay for hosting the auctions. An insertion fee, a final auction value fee, fees charged by Paypal.com for accepting my customer's payments electronically. Added to that were the cost and time to pack up and travel to the post office to mail the goods. The transaction costs were just more than I had imagined. The internet may have reduced transaction costs in general, but not enough for me to consider doing that again.

References

Gwartney, J. D., Stroup, R. L., Sobel, R. S., & Macpherson, D.A. (13th ed.). (2011). Economics:

Private and public choice. Mason, OH: South-Western, Cengage Learning.

Middleman. (n.d.). In Merriam-Webster's online dictionary. Retrieved from

http://www.merriam-webster.com/dictionary/middleman