This note is a part of my Zettelkasten. What is below might not be complete or accurate. It is also likely to change often.
20th July, 2020

Transaction costs of the market

Imagine a scenario where an entrepreneur has access to an Ideal Market - whatever they wanted to get done is available on the market for the right price - instantaneously and exactly as required. This is an ideal scenario - an ideal market. Reality is not different though, there are many transaction costs in an imperfect market.

In an imperfect, real world market, the entrepreneur will have to first find the right resource to do the required work, communicate the requirements, negotiate, then hire or contract them, pay them, followup on progress, verify that work has been done well (it'll never be as perfect as our ideal market) or try to get the money back if the contractee absconds. This process is much harder when the required resource is rare or a monopoly.

These impediments are transaction costs - they impede free trade and make it harder to operate in a particular market. Some of the transaction costs are :

  • Price Discovery - Bargaining with the party or paying an information broker
  • Taxes like sales tax - by the government
  • Cost of policing and enforcement of contracts
  • Quotas or price controls
  • Search and Information costs
  • Cost of keeping trade secrets
  • Monopoly/Monopolistic practices