Transaction cost, in a market context, identifies the expenses incurred when participating in an economic activity. Trading is termed successful when the buyer is able to receive goods or services from the seller. Transaction cost identifies the expenses incurred in achieving a successful transaction in a market context. Based on consideration, there are three factors that influence the level of transaction cost and this include; search and information factor, bargaining factor and policing and enforcement factor.
Prior to purchasing a product, a customer may take time to search for information relating to a product to make informed decision. The time taken to search for information will determine the level of transaction cost relating to the economic activity. Bargaining is part of the economic activity within a market hence there are costs relating to the process. An increase in bargaining cost will lead to an increase in transaction cost while a decrease will lead to a decrease in transaction cost. Delivery of goods and services can take time hence the importance of policing and enforcement aspect in a trading activity. Policing and enforcement cost can increase, hence, the higher the policing and enforcement costs, the higher the transaction costs relating to the economic activity.