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The Generalized Nash Bargaining Solution for Transfer Price Negotiations Under Incomplete Information

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  • Claus-Jochen Haake

    (Paderborn University)

  • Sonja Recker

    (Paderborn University)

Abstract

In our model two divisions negotiate over type-dependent contracts to determine an intrafirm transfer price for an intermediate product. Since the upstream division’s (seller’s) costs and downstream division’s (buyer’s) revenues are supposed to be private information, we formally consider cooperative bargaining problems under incomplete information. This means that the two divisions consider allocations of expected utility generated by mechanisms that satisfy (interim) individual rationality, incentive compatibility and/or ex post efficiency. Assuming two possible types for buyer and seller each, we first establish that the bargaining problem is regular, regardless whether or not incentive and/or efficiency constraints are imposed. This allows us to apply the generalized Nash bargaining solution to determine fair transfer payments and transfer quantities. In particular, the generalized Nash bargaining solution tries to balance divisional profits, while incentive constraints are still in place. In that sense a fair profit division is generated. Furthermore, by means of illustrative examples we derive general properties of this solution for the transfer pricing problem and compare the model developed here with the models existing in the literature. We demonstrate that there is a tradeoff between ex post efficiency and fairness.

Suggested Citation

  • Claus-Jochen Haake & Sonja Recker, 2018. "The Generalized Nash Bargaining Solution for Transfer Price Negotiations Under Incomplete Information," Group Decision and Negotiation, Springer, vol. 27(6), pages 905-932, December.
    • Handle: RePEc:spr:grdene:v:27:y:2018:i:6:d:10.1007_s10726-018-9592-8
    DOI: 10.1007/s10726-018-9592-8
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    References listed on IDEAS

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    Cited by:

    1. Kwang Mong Sim, 2023. "An Incentive-Compatible and Computationally Efficient Fog Bargaining Mechanism," Computational Economics, Springer;Society for Computational Economics, vol. 62(4), pages 1883-1918, December.
    2. Luis C. Dias & Rudolf Vetschera, 2022. "Two-party Bargaining Processes Based on Subjective Expectations: A Model and a Simulation Study," Group Decision and Negotiation, Springer, vol. 31(4), pages 843-869, August.

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    More about this item

    Keywords

    Cooperative bargaining; Generalized Nash bargaining solution; Transfer pricing; Incomplete information;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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