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Technological Advances , Consumer Transaction Costs , and Consumer Welfare

Consumers incur many transaction costs in purchasing and using most products. This paper examines the effects of a reduction in such consumer transaction costs caused by market-level technological advances. Using a model in which consumers are simultaneously heterogenous in their transaction costs and in their marginal valuation of product quality, we highlight two mechanisms that can cause such reductions in consumer transaction costs to lower consumer surplus and reduce consumer share of the total social surplus. We also show that when a seller can invest to reduce consumer transaction costs, consumers may be better off with higher transaction costs. Finally, the paper shows how such reductions in consumer transaction costs can either lower or raise consumer prices. (