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Cooperative Transfer Price Negotiations under Incomplete Information

Author

Listed:
  • Sonja Brangewitz

    (University of Paderborn)

  • Claus-Jochen Haake

    (University of Paderborn)

Abstract

In this paper, we analyze a model in which two divisions negotiate over an intrafirm transfer price for an intermediate product. Formally, we consider bargaining problems under incomplete information, since the upstream division’s (seller's) costs and downstream division's (buyer's) revenues are supposed to be private information. Assuming two possible types for buyer and seller each, we first establish that the bargaining problem is regular, regardless whether incentive and/or efficiency constraints are imposed. This allows us to apply the generalized Nash bargaining solution to determine transfer payments and transfer probabilities. Furthermore, we derive general properties of this solution for the transfer pricing problem and compare the model developed here with the existing literature for negotiated transfer pricing under incomplete information. In particular, we focus on the models presented in Wagenhofer (1994).

Suggested Citation

  • Sonja Brangewitz & Claus-Jochen Haake, 2013. "Cooperative Transfer Price Negotiations under Incomplete Information," Working Papers CIE 64, Paderborn University, CIE Center for International Economics.
    • Handle: RePEc:pdn:ciepap:64
    as

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    File URL: http://groups.uni-paderborn.de/wp-wiwi/RePEc/pdf/ciepap/WP64.pdf
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    References listed on IDEAS

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    1. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April.
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    3. Claus-Jochen Haake & Jan Thomas Martini, 2013. "Negotiating Transfer Prices," Group Decision and Negotiation, Springer, vol. 22(4), pages 657-680, July.
    4. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
    5. John C. Harsanyi, 1968. "Games with Incomplete Information Played by "Bayesian" Players Part II. Bayesian Equilibrium Points," Management Science, INFORMS, vol. 14(5), pages 320-334, January.
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    7. Weidner, Frank, 1992. "The Generalized Nash Bargaining Solution and Incentive Compatible Mechanisms," International Journal of Game Theory, Springer;Game Theory Society, vol. 21(2), pages 109-129.
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    9. Alfred Wagenhofer, 1994. "Transfer pricing under asymmetric information," European Accounting Review, Taylor & Francis Journals, vol. 3(1), pages 71-103.
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    Cited by:

    1. Yuanhua Feng & Sarah Forstinger & Christian Peitz, 2013. "On the iterative plug-in algorithm for estimating diurnal patterns of financial trade durations," Working Papers CIE 66, Paderborn University, CIE Center for International Economics.

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    More about this item

    Keywords

    Transfer Pricing; Negotiation; Generalized Nash Bargaining Solution; 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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