No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Six: Applications in Markets 137 Bargaining costs are another type of transaction cost and can vary considerably; they tend to increase based on the size of the profit margins of the good or service. For example, one wouldn’t think of going into Walmart and trying to negotiate on the price of the good. This is not just because of the fact that it’s a large firm; Walmart tends to cut the profit on each item very low and make up for it by selling a high volume. However, if one goes to buy a car, one would be foolish to simply say “how much” and then write the check. But the time and stress of negotiating the transaction is a definite cost of doing business. These bargaining costs are not limited to end sales. All businesses tend to negotiate with suppliers of inputs to their production process, and these costs will be included in the final price. Walmart is famous (or infamous, depending on your point of view) for being a tough negotiator on suppliers in its bid to decrease costs to the consumer (and thus make more profits for itself). In smaller markets, bargaining costs can be significant and possibly limit sales. Items seen for sale online sometimes are labeled for a price followed by “OBO” (or best offer). In that case, the seller of the item is willing to negotiate and doesn’t consider the costs of negotiating as exceeding the benefits. Other ads will have the price as “FIRM,” trying to eliminate the bargaining costs for the seller. A final transaction cost to consider is that of enforcement. This encompasses the access to legal systems to enforce contracts, as well as the informal institutional ways people use to ensure both sides of the exchange will live up to their part of the bargain. This could include such things as trader scores and feedback on the Internet. It also includes the cost of building up trust in relationships. This is one reason why businesses will not quickly change relationships with suppliers; a cheaper monetary price may not be sufficient to overcome the cost of building up trust and informal working arrangements that a business may have with existing suppliers. New businesses understand the difficulty of “breaking in” to a market to get their business off the ground. Purchasers of items on eBay will often look askance at someone selling an item with zero or low feedback; there is no reputation to decrease the potential enforcement cost (see Figure 6.6 ) . Figure 6.6, eBay Feedback Example.