Transaction Costs

Transaction costs are the costs of ‘doing business’ and may be classified in terms of internal and external transaction costs. Time spent developing service level agreements and discussions about internal transfer pricing are examples of internal transaction costs. Market reviews, supplier appraisal, negotiations and the costs of drawing up and managing contracts between two separate entities are examples of external transaction costs. The concept was popularised through transaction cost economics and part of the rationale behind cooperative supplier relationships is the reduction in external transaction costs.