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Transaction costs can be defined as the expenses incurred during individual transactions within an organization. Unlike agency costs, which deal with relationships between agents and principals, transaction costs focus on the expenses related to specific actions or transactions. Understanding transaction costs is essential for directors, as they must evaluate both internal and external transactions for their net effects.
Types of Transaction Costs
Transaction costs can be categorized into three main types:
- Search and Information Costs: These are the expenses associated with gathering information necessary to make informed purchasing decisions. This includes costs related to identifying available goods in the market, finding suppliers, and comparing prices.