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Decentralization and Transfer Pricing Under Oligopoly

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  • Laixun Zhao

Abstract

This paper presents a simple model of a partially decentralized multinational firm (MNF) in competition with a rival firm. It is shown that transfer pricing can be used as a rent-shifting device by the MNF to compete with the rival. This arises because the MNF headquarters uses the transfer price to manage different subsidiaries. The specific value of the transfer price chosen by the MNF depends on whether the rival firm produces the intermediate good, the final good, or both and whether the rival is integrated or not. In particular, both decentralization and competition with a fully integrated rival result in lower transfer prices.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 67 (2000)
Issue (Month): 2 (July)
Pages: 414-426

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Handle: RePEc:sej:ancoec:v:67:2:y:2000:p:414-426

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Web page: http://www.southerneconomic.org/
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Cited by:
  1. Chongwoo Choe & Noriaki Matsushima, 2012. "The Arm’s Length Principle and Tacit Collusion," Development Research Unit Working Paper Series 02-12, Monash University, Department of Economics.
  2. 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.
  3. 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.
  4. Thépot, Jacques & Netzer, Jean-Luc, 2008. "On the optimality of the full-cost pricing," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 282-292, October.
  5. Søren Bo Nielsen & Pascalis Raimondos-Møller & Guttorm Schjelderup, 2005. "Centralized vs. De-centralized Multinationals and Taxes," CESifo Working Paper Series 1586, CESifo Group Munich.
  6. Lakhal, Salem Y. & H'Mida, Souad & Venkatadri, Uday, 2005. "A market-driven transfer price for distributed products using mathematical programming," European Journal of Operational Research, Elsevier, vol. 162(3), pages 690-699, May.

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