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New Institutional EconomicsFiled Under: General

There are many possible approaches to investigate different aspects of information and communication technology and electronic commerce. This chapter chooses the perspective of New Institutional Economics, more precisely the Transaction Cost Approach, which has been developed since the 1950s because of certain deficits in the Neoclassical Theory. The criticism leveled is that the use of a market or of the legal system is neither free nor without frictions (Williamson, 1990). On the contrary, institutions have to be taken into account and transaction costs arise.

Ostrom (1990, p.51) states as follows:

“Institutions” can be defined as the sets of working rules that are used to determine who is eligible to make decisions in some area, what actions are allowed or constrained, what aggregation rules will be used, what procedures must be followed, what information must or must not be provided, and what
payoffs will be assigned to individuals dependent on their actions.

?Transactions
The basis of the Transaction Cost Approach was established by Coase in 1937, who questioned the reason for the existence of firms. He concludes that, “there is a cost of using the price mechanism” during the transactional process between individuals. The  term “transaction” was introduced into the economic context by Commons (1990, p.58),  who reasoned:

Transactions [...] are not the “exchange of commodities,” in the physical sense
of “delivery,” they are the alienation and acquisition, between individuals,
of the rights of future ownership of physical things, as determined by collective
working rules of society.

Other authors do not limit the relevance to property rights. Williamson (1985, p.1) claims
that a transaction “occurs when a good or a service is transferred across a technologically
separable interface.” This definition will be the basis for all further discussion in this
context. Many differing points of view can be found, but there is at least agreement that
transactions are not free.

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