The Armâ€™s Length Principle, Transfer Pricing and Foreclosure under Imperfect Competition
AbstractAbstract: This paper studies a multinational firmâ€™s transfer price decisions in imperfectly competitive market settings. It investigates whether the firmâ€™s optimal transfer price coincides with the armâ€™s length price and examines how the firm might respond if it is compelled to follow the armâ€™s length principle. The main findings are: (1) in the absence of tax transfer incentives, the firmâ€™s optimal transfer price does not coincide with the armâ€™s length price. If the firm is compelled to follow the armâ€™s length principle, it has an incentive to circumvent the armâ€™s length principle by keeping two sets of books, one for internal management, and another for tax reporting purposes; (2) the armâ€™s length principle can affect the MNFâ€™s decision on whether or not to foreclose its competitor. Absent profit shifting incentives, the firm will foreclose its downstream competitor. Imposing the armâ€™s length principle induces the firm to supply its competitor, but the firm can revert to its foreclosure decision by keeping two sets of books. If the firmâ€™s upstream and downstream divisions face different tax rates, the firmâ€™s foreclosure decision will be reversed if the armâ€™s length principle is enforced.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 20-10.
Length: 20 pages
Date of creation: May 2010
Date of revision:
Contact details of provider:
Postal: Department of Economics, Monash University, Victoria 3800, Australia
Web page: http://www.buseco.monash.edu.au/eco/
More information through EDIRC
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Simon Angus).
If references are entirely missing, you can add them using this form.