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The Transfer Pricing Problem with Non-Linearities

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  • S. Zverovich
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    Abstract

    A number of approaches to solving the well-known transfer pricing problem are known. However, few models satisfactorily resolve the core problem of allowing both the source and receiving divisions to earn a profit on transfers during a period in such a way that sub-optimal output levels are avoided. In 1969, Samuel proposed to use a transfer price schedule instead of just a single transfer price. An essential improvement of Samuels' model was given by Tomkins (1990) in his pragmatic-analytical transfer pricing approach, which is a combination of a single cost-plus transfer price and the pragmatic process of negotiation. This fundamental approach was developed under the assumption that the net average revenue curve for the final product is linear. In this paper, Tomkins' pragmatic-analytical model is further developed for non-linear net average revenue curves. In particular, typical quadratic functions are considered and corresponding transfer price schedules are determined. A similar technique can be used for the transfer pricing problem with any net average revenue curve.

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    File URL: http://arxiv.org/pdf/0903.3346
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    Paper provided by arXiv.org in its series Papers with number 0903.3346.

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    Date of creation: Mar 2009
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    Handle: RePEc:arx:papers:0903.3346

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    Web page: http://arxiv.org/

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    1. 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.
    2. Lantz, Björn, 2009. "The double marginalization problem of transfer pricing: Theory and experiment," European Journal of Operational Research, Elsevier, vol. 196(2), pages 434-439, July.
    3. Pfeiffer, Thomas, 1999. "Transfer pricing and decentralized dynamic lot-sizing in multistage, multiproduct production processes," European Journal of Operational Research, Elsevier, vol. 116(2), pages 319-330, July.
    4. Vidal, Carlos J. & Goetschalckx, Marc, 2001. "A global supply chain model with transfer pricing and transportation cost allocation," European Journal of Operational Research, Elsevier, vol. 129(1), pages 134-158, February.
    5. Jack Hirshleifer, 1956. "On the Economics of Transfer Pricing," The Journal of Business, University of Chicago Press, vol. 29, pages 172.
    6. Villegas, F. & Ouenniche, J., 2008. "A general unconstrained model for transfer pricing in multinational supply chains," European Journal of Operational Research, Elsevier, vol. 187(3), pages 829-856, June.
    7. Li, Shu-Hsing & Balachandran, Kashi R., 1997. "Optimal transfer pricing schemes for work averse division managers with private information," European Journal of Operational Research, Elsevier, vol. 98(1), pages 138-153, April.
    8. Gjerdrum, Jonatan & Shah, Nilay & Papageorgiou, Lazaros G., 2002. "Fair transfer price and inventory holding policies in two-enterprise supply chains," European Journal of Operational Research, Elsevier, vol. 143(3), pages 582-599, December.
    9. Lakhal, Salem Y., 2006. "An operational profit sharing and transfer pricing model for network-manufacturing companies," European Journal of Operational Research, Elsevier, vol. 175(1), pages 543-565, November.
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