In this paper, we consider the impact of transaction cost in channel competition by analyzing the channel structure. A new type of transaction cost demand function is introduced by Chen et al. (2006). We used this demand function to discuss a two-retailer channel competition in Nash game. The results fined, when transaction costs exist, the sellers would pay attention to the transaction cost efficiency index of consumers which will affect the behavior of a consumer’s purchase decision. Different affect of transaction costs are also possible by changing from parameters. The implications of these results and directions for future research are discussed.