2 Exchange, Transaction Cost, and Trust

A successful transaction requires three things:  the buyer must be willing to pay a price higher or equal to the stated price, the producer must be willing to sell the product at the stated price, and the costs of completing the transaction must be low enough to make it worthwhile.  I’m willing to buy the Ping G425 driver you have for $300.  You are willing to sell the Ping 425 driver in your possession for $250.  We negotiate a price of $275.  I’m happy, your happy.  However, if you live in California and I Iive in Minnesota and the shipping cost is $60 the transaction will not be completed.  The lower the transaction cost the more voluntary market exchanges will be completed.  E-commerce has successfully facilitated market exchanges by reducing the transaction cost.  You no longer need to go travel searching store to store for an item wasting your time.  Remember your time is also a transaction cost…opportunity cost.  The internet along with more efficient package delivery has reduced transaction cost encouraging more market transactions.   Remember the internet giant Amazon started as a simple online book seller.

The reduction of transaction cost through increased efficiency in transportation, shipping, delivery, and electronic data exchange has facilitated increased market exchanges globally.  A big part of why exchanges on the internet has been effective so far is trust.  You trust when you enter your credit card information you will not be overbilled or worse yet scammed.  Trust in e-commerce exchanges is vitally important.  Think of the trust required in purchasing a ride from Uber.  You give Uber your credit card and they send a stranger in their personal car to take you to your destination.  Of course, Uber gives you as much information as they can with GPS locations, picture of the vehicle with license plate number, the name of the driver, and star ratings of their performance.  You are trusting that Uber business model has done the vetting on this independent contractor when you enter the strangers vehicle.

Facilitating internet market exchange through low transaction cost, and trust has created new sharing companies like Airbnb (your house), Turo (your car),  Tulerie (your closet) and many more on the horizon.  Market transactions where buyers and sellers simply exchange for short rental periods are likely to become more common.  What is remarkable is that these companies don’t build anything or store product.  They simply bring those that want to use some thing with those that have something to loan and facilitate the exchange in a low cost transaction environment with most important of all transparent trust.

Questions:

1. Do some research. Describe how shipping containers have impacted transaction costs and global trade.
2. Pick an internet sharing company, not described above, and explain the steps they take to ensure trust in market exchanges.
3. BlaBlaCar is a large ride sharing network company that is used widely in Europe. Why has BlaBlaCar not been successful in the United States?
4. Look up the term “asymmetric information.” Explain why trust and reputation are important in transactions when asymmetric information exists.

Reference:

Munger, Michael. (2018) Tomorrow 3.0: Transaction Costs and the Sharing Economy. Cambridge University Press. United Kingdom.