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Profit Shifting in Two-Sided Markets

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  • Dirk Schindler
  • Guttorm Schjelderup

Abstract

We investigate how multinational two-sided platform firms set their prices on intra-firm transactions. Two-sided platform firms derive income from two customer groups that are connected through at least one positive network externality from one group to the other. A main finding is that, even in the absence of taxation, transfer prices deviate from marginal cost of production. A second result of the paper is that it is inherently difficult to establish arm's length prices in two-sided markets. Finally, we find that differences in national tax rates may be welfare enhancing, despite the use of (abusive) transfer prices as a profit-shifting device.

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File URL: http://www.tandfonline.com/10.1080/13571516.2010.513815
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.

Volume (Year): 17 (2010)
Issue (Month): 3 ()
Pages: 373-383

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Handle: RePEc:taf:ijecbs:v:17:y:2010:i:3:p:373-383

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Related research

Keywords: Multinational Enterprises; Two-Sided Markets; Profit Shifting;

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References

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  1. James R. Hines, Jr. & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," NBER Working Papers 3477, National Bureau of Economic Research, Inc.
  2. Alfons Weichenrieder, 1996. "Fighting international tax avoidance," Fiscal Studies, Institute for Fiscal Studies, vol. 17(1), pages 37-58, February.
  3. Jack Hirshleifer, 1956. "On the Economics of Transfer Pricing," The Journal of Business, University of Chicago Press, vol. 29, pages 172.
  4. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. Kind, Hans Jarle & Koethenbuerger, Marko & Schjelderup, Guttorm, 2008. "Efficiency Enhancing Taxation in Two-sided Markets," Discussion Papers 2008/1, Department of Business and Management Science, Norwegian School of Economics.
  6. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June Cita.
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