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transaction costs

  The costs associated with effecting an economic transaction, either through market exchange between two or more legally distinct economic actors, or internally within a single economic organization (firm or, more generally, \'hierarchy\'). Costs for market-mediated transactions might include: the cost of gathering information concerning the availability, price and quality of particular commodities (goods or services); the costs associated with identifying potential customers for one\'s output; the cost of determining the reliability of a supplier or the credit worthiness of a purchaser; the costs associated with negotiating the terms of a particular exchange, including price, delivery date, and terms of payment (and of setting these out in the form of an agreed contract); and the cost of completing a transaction (i.e. making or collecting payment). Costs will also accompany non-market transactions taking place within a single firm — i.e. the costs of organizing and coordinating complex, multi-step production processes in-house. transport costs associated with moving goods between transacting parties (whether within the same firm or in different firms) are one form of transaction cost that has traditionally received special attention from economic geography (cf. transport geography). However, as is evident in the following discussion, other forms of transaction cost have recently attracted considerably more interest within industrial geography.

Williamson (1975, 1985) is generally credited with developing the comprehensive economic analysis of transaction costs, extending the pioneering work by Coase (1937) in his classic paper on the nature and raison d\'être of the firm. Williamson\'s (1975) original motivation is clear (pp. 1-2): \'to achieve a better understanding of the origins and functions of various firm and market structures — stretching from elementary work groups to complex modern corporations\'. Instead of relying on technological arguments based on concepts such as indivisibilities or non-separabilities for explaining why two or more functions might be performed within the same firm (organizational hierarchy), Williamson takes another approach: \'I focus on transactions and the costs that attend completing transactions by one institutional mode rather than another\': he contends that \'transactional considerations, not technology, are typically decisive in determining which mode of organization will obtain in what circumstances and why\'. Most goods will require a number of semi-finished or intermediate inputs for their production. They will also require a number of discrete, separate functions to be performed as part of the overall production process. The extent to which all of these operations will be performed within a single (\'vertically integrated\') firm (cf. integration), versus the alternative approach in which some or all of the required inputs are produced by other firms and then acquired through some form of market transaction, depends (according to Williamson\'s analysis) on which mode of organization best succeeds at minimizing transaction costs (p. 8): \'whether a set of transactions ought to be executed across markets or within a firm depends on the relative efficiency of each mode\'. Generally, the more difficult or expensive the task of coordination or \'governance\' of the production process, the greater the likelihood that production will be vertically integrated within a single internal hierarchy .

The geographical significance of transaction costs (other than transportation costs) was first made clear by Scott (1988) who demonstrated, both theoretically and empirically, that the spatial clustering of firms often serves to reduce the cost of transactions occurring between them. Under such conditions, firms will find it easier and cheaper to acquire the requisite information concerning potential buyers and suppliers nearby. Moreover, because such firms may be managed by individuals who have come into contact with one another repeatedly over extended periods of time, they may have built up a high degree of familiarity and trust between them which serves to facilitate the sharing of information and the successful achievement of non-routine transactions (Harrison, 1992) — what Storper (1997) describes as \'untraded interdependencies\'. When such circumstances prevail, Scott argued, one should expect to find a much more fully articulated social division of labour, in which individual firms specialize in the production of a relatively small number of goods and/ or services and trade actively with one another. Such arrangements are likely to be especially useful in industries for which market tastes are changing rapidly, and in which product life cycles are short. Since input requirements for such goods will also change rapidly, spatial concentration will reduce the transaction costs associated with producers finding and assessing the performance characteristics of potential new suppliers. Similarly, when the product is complex or highly customized, it is advantageous for producers and users to interact frequently and easily. Possibilities for achieving this are enhanced when the user and producer are close to one another, thereby reducing the cost of such a complex transaction (Lundvall, 1988).

Hence, as Storper (1997) has observed (pp. 34-5), this kind of analysis demonstrates \'that geography figures in transaction costs in general, and hence influences the boundaries of the firm and production system\': he also concludes that \'the geography of transaction costs helps explain agglomeration and spatial divisions of labour\'. However, the transaction cost approach has been criticized for its rather reductionist analysis of industrial organization — for its \'exclusive focus on the transaction rather than the relationship\' (Powell, 1990, p. 323) and for its tendency to ignore the influence of the public sector in shaping the institutions (such as markets) which mediate exchange (Harrison, 1997). (See also economies of scale; economies of scope; industrial district; industrial organization; just-in-time production; social capital.) (MSG)

References Coase, R. 1937: The nature of the firm. Economica 4: 386-4 05. Harrison, B. 1992: Industrial districts: old wine in new bottles? Regional Studies 26: 469-8 3. Harrison, B. 1997: Lean and mean. New York: Guilford: Lundvall, B.-A. 1988: Innovation as an interactive process : from user-producer interaction to the national system of innovation. In G. Dosi, C. Freeman, R. Nelson, G. Silverberg and L. Soete, eds, Technical change and economic theory. London: Pinter, 349-69. Powell, W.W. 1990: Neither market nor hierarchy: network forms of organization. In B. Straw and L. Cummings, eds, Research in organizational behavior. Greenwich, CT: JAI Press, 295-336. Scott, A.J. 1988: New industrial spaces. London: Pion. Storper, M. 1997: The regional world. New York: Guilford. Williamson, O.E. 1975: Markets and hierarchies. New York: The Free Press. Williamson, O.E. 1985: The economic institutions of capitalism. New York: The Free Press.



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