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Cooperative Transfer Price Negotiations under Incomplete Information

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  • Sonja Brangewitz

    ()
    (University of Paderborn)

  • Claus-Jochen Haake

    ()
    (University of Paderborn)

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    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).

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    File URL: http://groups.uni-paderborn.de/wp-wiwi/RePEc/pdf/ciepap/WP64.pdf
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    Bibliographic Info

    Paper provided by University of Paderborn, CIE Center for International Economics in its series Working Papers CIE with number 64.

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    Length: 29
    Date of creation: Jul 2013
    Date of revision:
    Handle: RePEc:pdn:ciepap:64

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    Keywords: Transfer Pricing; Negotiation; Generalized Nash Bargaining Solution; Incomplete Information;

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    References

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    1. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, Econometric Society, vol. 47(1), pages 61-73, January.
    2. Weidner, Frank, 1992. "The Generalized Nash Bargaining Solution and Incentive Compatible Mechanisms," International Journal of Game Theory, Springer, Springer, vol. 21(2), pages 109-29.
    3. Holmstrom, Bengt & Myerson, Roger B, 1983. "Efficient and Durable Decision Rules with Incomplete Information," Econometrica, Econometric Society, Econometric Society, vol. 51(6), pages 1799-819, November.
    4. Matsuo, Toshihide, 1989. "On incentive compatible, individually rational, and ex post efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, Elsevier, vol. 49(1), pages 189-194, October.
    5. Vaysman, Igor, 1998. "A model of negotiated transfer pricing," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 25(3), pages 349-384, June.
    6. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, Econometric Society, vol. 21(1), pages 128-140, April.
    7. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, Econometric Society, vol. 18(2), pages 155-162, April.
    8. M. Harris & C. H. Kriebel & A. Raviv, 1982. "Asymmetric Information, Incentives and Intrafirm Resource Allocation," Management Science, INFORMS, INFORMS, vol. 28(6), pages 604-620, June.
    9. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, Elsevier, vol. 29(2), pages 265-281, April.
    10. John C. Harsanyi, 1968. "Games with Incomplete Information Played by `Bayesian' Players, Part III. The Basic Probability Distribution of the Game," Management Science, INFORMS, INFORMS, vol. 14(7), pages 486-502, March.
    11. John C. Harsanyi & Reinhard Selten, 1972. "A Generalized Nash Solution for Two-Person Bargaining Games with Incomplete Information," Management Science, INFORMS, INFORMS, vol. 18(5-Part-2), pages 80-106, January.
    12. Alfred Wagenhofer, 1994. "Transfer pricing under asymmetric information," European Accounting Review, Taylor & Francis Journals, Taylor & Francis Journals, vol. 3(1), pages 71-103.
    13. John C. Harsanyi, 1968. "Games with Incomplete Information Played by "Bayesian" Players Part II. Bayesian Equilibrium Points," Management Science, INFORMS, INFORMS, vol. 14(5), pages 320-334, January.
    14. John C. Harsanyi, 1967. "Games with Incomplete Information Played by "Bayesian" Players, I-III Part I. The Basic Model," Management Science, INFORMS, INFORMS, vol. 14(3), pages 159-182, November.
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