Editing Transaction cost (section)

== Examples ==
A supplier may bid in a very competitive environment with a customer to build a [[widget (economics)|widget]]. To make the widget, the supplier needs to build specialized machinery that cannot be used to make other products. Once the contract is awarded to the supplier, the relationship between customer and supplier changes from a competitive environment to a [[monopoly]]/[[monopsony]] relationship, known as a [[bilateral monopoly]]. This means that the customer has greater leverage over the supplier. To avoid these potential costs, "hostages" may be swapped, which may involve partial ownership in the widget factory and revenue sharing.

Car companies and their suppliers often fit into this category, with the car companies forcing price cuts on their suppliers. Defense suppliers and the military appear to have the opposite problem, with cost overruns occurring quite often. 

An example of measurement, one of North's four factors of transaction costs, occurs when roving bandits calculate the success of their banditry based on how much money they can take from their citizens.<ref>{{Cite journal|last=Olson|first=Mancur|date=September 1993|title=Dictatorship, Democracy, and Development|jstor=2938736|journal=The American Political Science Review|volume=87|issue=3|pages=567–576|doi=10.2307/2938736|s2cid=145312307 }}</ref> Enforcement, the second of North's factors of transaction costs, may take the form of a mediator in dealings with the Sicilian mafia when it is not certain that both parties will maintain their end of the deal.<ref>{{Cite book|title=The Sicilian Mafia: the Business of Private Protection|last=Gambetta|first=Diego|publisher=Harvard University Press|year=1996|isbn=978-0674807426|pages=15}}</ref>