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Strategic Transfer Pricing

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Author Info

  • Michael Alles

    (CBA 4M-202, University of Texas at Austin, Austin, Texas 78712)

  • Srikant Datar

    (Harvard Business School, Accounting and Control Area, Soldier's Field, Boston, Massachusetts 02163)

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    Abstract

    Most research into cost systems has focused on their motivational implications. This paper takes a different approach, by developing a model where two oligopolistic firms strategically select their cost-based transfer prices. Duopoly models frequently assume that firms game on their choice of prices. Product prices, however, are ultimately based on the firms' transfer prices that communicate manufacturing costs to marketing departments. It is for this reason that transfer prices will have a strategic component to them. We derive implications for cost system choice and transfer pricing, including showing that firms may cross subsidize their products---a result consistent with the empirical evidence.

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    File URL: http://dx.doi.org/10.1287/mnsc.44.4.451
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 44 (1998)
    Issue (Month): 4 (April)
    Pages: 451-461

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    Handle: RePEc:inm:ormnsc:v:44:y:1998:i:4:p:451-461

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    Related research

    Keywords: transfer pricing; full cost allocation; incentives; costing;

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    Cited by:
    1. Ni, Jian & Chu, Lap Keung & Wu, Feng & Sculli, Domenic & Shi, Yuan, 2012. "A multi-stage financial hedging approach for the procurement of manufacturing materials," European Journal of Operational Research, Elsevier, vol. 221(2), pages 424-431.
    2. Choe, Chongwoo & Matsushima, Noriaki, 2011. "The Arm's Length Principle and Tacit Collusion," MPRA Paper 37295, University Library of Munich, Germany, revised 12 Mar 2012.
    3. Lambert, Richard A., 2001. "Contracting theory and accounting," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 3-87, December.
    4. Rosenthal, Edward C., 2008. "A game-theoretic approach to transfer pricing in a vertically integrated supply chain," International Journal of Production Economics, Elsevier, vol. 115(2), pages 542-552, October.
    5. Jacques Thépot & Jean-Luc Netzer, 2007. "On the optimality of the full cost pricing," Working Papers of LaRGE Research Center 2007-05, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    6. Das, K. & Sengupta, S., 2009. "A hierarchical process industry production-distribution planning model," International Journal of Production Economics, Elsevier, vol. 117(2), pages 402-419, February.
    7. Nathan Berg & Chun-Yu Chen & Barry J. Seldon, 2014. "Strategic Transfer Pricing and Intensity of Competition," Working Papers 1403, University of Otago, Department of Economics, revised Mar 2014.
    8. Kenji Matsui, 2012. "Auditing internal transfer prices in multinationals under monopolistic competition," International Tax and Public Finance, Springer, vol. 19(6), pages 800-818, December.
    9. Erickson, Gary M., 2012. "Transfer pricing in a dynamic marketing-operations interface," European Journal of Operational Research, Elsevier, vol. 216(2), pages 326-333.
    10. 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.
    11. Matsui, Kenji, 2012. "Strategic upfront marketing channel integration as an entry barrier," European Journal of Operational Research, Elsevier, vol. 220(3), pages 865-875.

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