Within the approach of New Institutional Economics associated with Oliver Williamson and others, emphasis is placed on transaction costs as a key factor in explaining why different forms of economic organisation arise in different circumstances. Transaction costs have been defined, eg here, as including search and information costs, bargaining and decision costs, and policing and enforcement costs.

Question: Suppose I go to a supermarket that I know well, buy branded packaged goods of kinds that I have bought many times before, and transport the goods home. Should the cost of my travel to the supermarket and transporting the goods home, in this situation in which any elements of search, information gathering, etc are minimal, be regarded as a transaction cost?

  • $\begingroup$ Wonderful question as evident from the confusion below. Let me add something to this confusion: I think it depends on your definition on what constitutes a market for a good. If all bananas in the world are part of the same market, then it may (or may not) be the case that transportation costs are part of transaction costs. If a banana across the street is part of a different market than a banana one store further, then probably not. $\endgroup$ – HRSE Nov 24 '15 at 2:18
  • $\begingroup$ Wow - who would have thought that a question like this would have generated such a difference in opinion. I guess, in summary, you can't really go wrong as long as you can explain yourself. $\endgroup$ – Jamzy Nov 24 '15 at 9:33

Since it was mentioned in an another answer let's clear this first: whether the transportation (and its time and monetary costs) should be associated with the intended consumption of the good you are going to purchase, or it can be considered as consumption on its own, depends on your subjective view of it: do you derive any form of pleasure by the trip itself? If yes, at least part of it should be considered consumption per se.

The consensus among economists appears to be that most of such travel is not considered by the consumers as utility-enhancing per se (although trends like "family-shopping on Saturday" may say a different story), and so it should be interpreted in a different way.

In the field of Industrial Organization, the good's distance from the consumer has been often treated as an aspect of product differentiation.

You could certainly treat it as a "transaction cost", by suitably define the scope of the concept. Personally I prefer to think of it as an access cost. I hit upon this concept in a little side-research I did in hedonic-price analysis.

If you start to think about it, all packaging and transportation costs from the supplier to the shop are also "access costs" from the point of view of the consumer. They don't provide any direct utility to him -they are obligatory costs that end up increasing the price, so that the consumer is able to acquire the good and enjoy the services/utility of the good itself.

Think computers: only the materials themselves and the technology embodied in them provide utility to you (plus maybe the brand). But the price includes all shorts of overheads, like the access costs I mentioned, or marketing costs (that can be seen as information costs or as the price to pay for competition and the innovation and product variety that brings along), etc.

  • $\begingroup$ The only problem I have with this view is that transporting the good (travel) indirectly has a market through transportation companies that do it for you. Just as waste disposal is a good/service, even though I receive no utility from waste. In my view, if there is a market for it, it becomes a seperate good/service. I can purchase a good online without consuming it (no transportation) so transportation per se doesnt affect obtaining the good (legally). I can also buy a useless tennis racket without a ball and never consume the racket. Transportation affects consumption but not purchase. $\endgroup$ – BB King Nov 24 '15 at 2:42
  • $\begingroup$ @BBKing Goods and services are bundled routinely. What is a separate good to somebody, is an associated cost to some other good for somebody else. We are not talking about "transportation services" in general here, which certainly have market(s) on their own, and are utility-enhancing in many cases (say, sight seeing on an open bus, etc). We are talking about a specific action that must be undertaken (when it must) in order to purchase and consume a good. $\endgroup$ – Alecos Papadopoulos Nov 24 '15 at 2:50
  • $\begingroup$ There's always a market available in having someone else go to the store, buy the good, and bring it to my place of choice. If I buy a banana at the grocery store, the service of transporting the banana to the grocery store is bundled in the price. If I want the banana delivered to my home, I can do it myself, at some cost, or I can get TaskRabbit, Instacart, a random dude on Craigslist, the store's delivery service, a friend, etc... to deliver, which may involve different costs. The actual good we care about is a banana in my home, not the mere legal ownership of a banana somewhere. $\endgroup$ – Zach Lipton Nov 24 '15 at 8:09

Short Answer: No.

Transaction costs are defined as costs related to overcoming a market imperfection. Most people do not consider distance from a store(market) to be a market imperfection, but in some cases some do consider this. It was always my professors' opinion that transaction costs should not include transportation costs and in what follows I'll tell you why.

With transaction costs we typically never mean transportation costs. Transportation is considered another good (rather a service) that we pay for. Transportation is a welfare/utility increasing good, which you would like to have. Therefore transportation has a positive price.

Transaction costs refer to costs that do not go towards obtaining more welfare enhancing (desired) goods and services.

In your supermarket example, the cost of searching for your desired good would be the transaction cost. Searching for it is costly, however does not provide you with any extra good/service/utility, so this cost is purely about obtaining another good and is a cost in addition to the price of the good and nothing more.

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    $\begingroup$ I think this answer is incorrect. This definition includes transport: businessdictionary.com/definition/transaction-cost.html (admittedly I don't know much about this dictionary). I can't think of a reason distance to the market would not be a transaction cost. $\endgroup$ – Jamzy Nov 24 '15 at 0:53
  • $\begingroup$ The businessdictionary definition says transaction costs may also include transportation costs meaning that they also may not include them. In my answer I said that it may be ambiguous depending on your point of view. As for why its not a transaction cost, I gave the argument of transportation as a seperate service and not exclusively related to the exchange itself. You can buy something with no market imperfection before and regardless of how you will transport it (in the store).E.g. I have access to markets through Amazon and easily buy (legally become the owner) of goods far away from me. $\endgroup$ – BB King Nov 24 '15 at 0:57
  • $\begingroup$ @Jamzy Continuing the example: When I purchase something online this goes well with or without transportation costs. So the transportation costs exist outside of my access to the marketplace. To actually obtain the goods, I or Amazon for me hires a separate service provider, i.e. the post or DHL,etc. to send me the goods. However I have access to the online market and can buy things regardless of where I am. As I mentioned, it is my and my professors' opinion that transportation costs are not transaction costs, however I also said that opinions might differ here. $\endgroup$ – BB King Nov 24 '15 at 1:01
  • $\begingroup$ I suppose in many analysis it would be discretionary as to whether transaction costs are considered. It very much depends on the scale of the cost as to whether it is worthwhile. I don't see transportation to and from a supermarket as something fundamentally different from a credit card fee on a transaction. Merely an ancillary cost to the primary exchange. $\endgroup$ – Jamzy Nov 24 '15 at 1:10
  • $\begingroup$ Sorry, I don't quite follow your amazon example. Could you please clarify it. $\endgroup$ – Jamzy Nov 24 '15 at 1:10

I very much like this question and Alecos' answer.

We understand the role of transaction costs in the generation of externalities. But the transaction costs concept itself is very difficult to define rigorously. Dalhman (1979) examines what kinds of transaction costs are necessary to generate externalities. He defines a workable concept of transaction costs: search and information costs, bargaining and decision costs, policing and enforcement costs. But he adds (p. 148) that

"this functional taxonomy of different transaction costs is unnecessarily elaborate: fundamentally, the three classes reduce to a single one-for they all have in common that they represent resource losses due to lack of information."

As far as I understand, in the international economics field, "costs of travel to buy goods" are considered as trade costs.

According to Anderson and van Wincoop (2004), p. 691-2

Trade costs, broadly defined, include all costs incurred in getting a good to a final user other than the marginal cost of producing the good itself: transportation costs (both freight costs and time costs), policy barriers (tariffs and nontariff barriers), information costs, contract enforcement costs, costs associated with the use of different currencies, legal and regulatory costs, and local distribution costs (wholesale and retail).



A wikipedia definition:

a transaction cost is a cost incurred in making an economic exchange (restated: the cost of participating in a market).

transport to a shopping center can definitely be considered a cost of participating in a market.

More intuitively, the idea of a transaction cost involves costs incurred on the consumer other than the direct price of a good.

This fits both the definition, and the intention of the definition.


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