Banana producers in Ethiopia sell their produce through wholesale traders, cooperatives, and to village retailers and local consumers. Factors determining the selection of marketing channels and their implication on the agri-food industrial organization have been given little attention in the literature. This paper uses a transaction cost economics (TCE) approach to explain farmers' choice between wholesale traders and marketing cooperatives. By using a Tobit model, an effort is exerted to demonstrate the empirical application of TCE theory and to measure transaction costs that influence agricultural marketing. The results on the basis of survey data collected in 2007 from different villages in Southern Ethiopia suggests that transaction costs play an important role in determining farmers' marketing channel choice decision. The paper has potential policy implications pertaining to the improvement of the agricultural market structure, conduct and performance and, eventually, the welfare of farmers. [Econ Lit citations: Q130, Q120]. © 2011 Wiley Periodicals, Inc.