Monday, October 02, 2006

Nobel Series: Oliver Williamson, part 1

The first possible Nobel economist that I will profile is Oliver Williamson, the one whose work I am most familiar with from graduate school.

He is the economist most responsible for the field of transaction cost economics. Transaction costs are the costs of an economic exchange. As an example, if you decide to buy a car, the price of the car is one of many costs you have to incur. You also have to research to find what kind of car you want, spend time driving to dealerships or looking through classifieds to find the car you want, and finally spend time negotiating on the price or terms of the deal. All of these are transaction costs. These type of costs are many times ignored in the theoretical realm of economic models, but Williamson brought attention to their effect.

Here is a review of one of Williamson's better known works by a UCLA law professor. He adds this assertion on Williamson and transaction costs:

Williamson's core idea is the theory of transaction cost economics. We can analogize transaction costs to friction: they are dead weight losses that reduce efficiency. They make transactions more costly and less likely to occur. Among the most important sources of transaction costs is the limited cognitive power of human decisionmakers.

Can you think of any other examples where transaction costs are important other than when buying cars? Are there cases where transaction costs can cause you to not make a purchase that you would make if they did not exist?


Anonymous said...

Transaction costs can also occur when buying a house. When people are looking around for a house they have to consider many things, such as location and price (obviously). People have to spend time deciding what location they want to live in. Whether they want to live in a neighborhood or just on a street. People also have to drive around to look at the different locations for their new house. People also have to deal with realators to determine a price that will work. Many people forget about these factors of time in their decision of buying a house.

Anonymous said...

I think most of the time transaction costs alter your decisions to purchase certain goods. Why would you put your time, effort, and money into something if there is a less costly option that would be just as benefitial to you. Another example that shows the importance of transaction costs is buying a house. If you do not have the time to build a house and make the countless decisions that comes along with building, then buying an already built house would be the better option for you. This is a case where transaction costs cause you not to make a purchase you would have made otherwise.

Anonymous said...

Sorry I did not see what Carolyn wrote.

Anonymous said...

This may or may not apply to everyone, but usually when my gas tank starts getting low i look around for gas stations that offer the cheapest price. also i reference my gas price widget on my computer that pings the lowest posted price of gasoline in my area. my transaction cost would be the time i spend to look up those prices and i guess the bandwidth that i use for that widget. with this case it is worth the transaction cost because i am a student and i want to spend as little money as possible on gasoline.