The Business Model with Minimal Transaction Costs
Transactions are handled in two ways—through the market or by ownership transfer—and both incur a transaction cost. Market-based transactions initially have an information gap as a company ostensibly knows more about its own products, while customers have a clearer idea of their own preferences. The resulting negotiations to close this information gap may be time- and energy-consuming for both sides. After the transaction, long-term contracts and lockup risks occur. Long-term contract risks may lead to an independent advantage scenario when market conditions change, while the lockup risk can result in a price squeeze on the investing party. Additionally, scattered customers may suffer unfair prices or lower-than-expected quality due to a monopoly, which incurs enormous transaction cost for customers.
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