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The double marginalization problem of transfer pricing: Theory and experiment

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  • Lantz, Björn
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    Abstract

    In this paper, we find that the idea of using optional two-part tariffs as a basis for tariff renegotiations in a bilaterally monopoly setting is a solution to the double marginalization problem that theoretically (1) creates a stable equilibrium, (2) at the overall efficient level, (3) without the presence of a central management. Through experimental testing, we find that the efficiency of this mechanism is significantly higher than the efficiency of simple direct negotiation, both under symmetrically and asymmetrically distributed information.

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    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 196 (2009)
    Issue (Month): 2 (July)
    Pages: 434-439

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    Handle: RePEc:eee:ejores:v:196:y:2009:i:2:p:434-439

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    Web page: http://www.elsevier.com/locate/eor

    Related research

    Keywords: Pricing Transfer pricing Experiment;

    References

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    1. Avila, Marcos & Ronen, Joshua, 1999. "Transfer-pricing mechanisms: An experimental investigation," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 689-715, July.
    2. Nicholas Economides, 1994. "Quality Choice and Vertical Integration," Working Papers 94-22, New York University, Leonard N. Stern School of Business, Department of Economics.
    3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    4. Dejong, Douglas V. & Forsythe, Robert & Kim, Jae-Oh & Uecker, Wilfred C., 1989. "A laboratory investigation of alternative transfer pricing mechanisms," Accounting, Organizations and Society, Elsevier, vol. 14(1-2), pages 41-64, January.
    5. Jack Hirshleifer, 1956. "On the Economics of Transfer Pricing," The Journal of Business, University of Chicago Press, vol. 29, pages 172.
    6. David Sibley, 1989. "Asymmetric Information, Incentives and Price-Cap Regulation," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 392-404, Autumn.
    7. Abel P. Jeuland & Steven M. Shugan, 1983. "Managing Channel Profits," Marketing Science, INFORMS, vol. 2(3), pages 239-272.
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    Cited by:
    1. Oliveira, Fernando S. & Ruiz, Carlos & Conejo, Antonio J., 2013. "Contract design and supply chain coordination in the electricity industry," European Journal of Operational Research, Elsevier, vol. 227(3), pages 527-537.
    2. Matsui, Kenji, 2014. "Gray-market trade with product information service in global supply chains," International Journal of Production Economics, Elsevier, vol. 147(PB), pages 351-361.
    3. Mujawamariya, Gaudiose & Burger, Kees & D'Haese, Marijke F.C., 2012. "Behaviour and performance of traders in the gum arabic supply chain in Senegal: Investigating oligopsonistic myths," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 126236, International Association of Agricultural Economists.
    4. Adachi, Takanori & Ebina, Takeshi, 2014. "Double marginalization and cost pass-through: Weyl–Fabinger and Cowan meet Spengler and Bresnahan–Reiss," Economics Letters, Elsevier, vol. 122(2), pages 170-175.
    5. Matsui, Kenji, 2011. "Intrafirm trade, arm's-length transfer pricing rule, and coordination failure," European Journal of Operational Research, Elsevier, vol. 212(3), pages 570-582, August.
    6. S. Zverovich, 2009. "The Transfer Pricing Problem with Non-Linearities," Papers 0903.3346, arXiv.org.

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