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Pricing Internal Trade to Get a Leg up on External Rivals

Author

Listed:
  • Anil Arya
  • Brian Mittendorf

Abstract

The pricing of transfers from parent to subsidiary is an oft‐explored issue. Linking the cost of internal transfers with external market prices is one common approach, typically justified when the market for the good is perfectly competitive. This paper shows that imperfect competition may also justify market‐based transfer prices. Concern that transfer price will deviate from marginal cost and thereby distort subsidiary choices can lead a parent to undertake actions to influence the market price of the upstream good. Such efforts can provide a desirable strategic posture in the upstream market.

Suggested Citation

  • Anil Arya & Brian Mittendorf, 2008. "Pricing Internal Trade to Get a Leg up on External Rivals," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(3), pages 709-731, September.
    • Handle: RePEc:bla:jemstr:v:17:y:2008:i:3:p:709-731
    DOI: 10.1111/j.1530-9134.2008.00192.x
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Lemus, Ana B. & Moreno, Diego, 2020. "Strategic incentives for keeping one set of books under the Arm’s Length Principle," Mathematical Social Sciences, Elsevier, vol. 106(C), pages 78-90.
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    3. CHOI, Jay Pil & FURUSAWA, Taiji & ISHIKAWA, Jota & 石川, 城太, 2018. "Transfer Pricing and the Arm's Length Principle under Imperfect Competition," Discussion paper series HIAS-E-73, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    4. Julio B. Clempner, 2018. "Strategic Manipulation Approach for Solving Negotiated Transfer Pricing Problem," Journal of Optimization Theory and Applications, Springer, vol. 178(1), pages 304-316, July.
    5. Julio B. Clempner & Alexander S. Poznyak, 2019. "Solving Transfer Pricing Involving Collaborative and Non-cooperative Equilibria in Nash and Stackelberg Games: Centralized–Decentralized Decision Making," Computational Economics, Springer;Society for Computational Economics, vol. 54(2), pages 477-505, August.
    6. Choe, Chongwoo & Matsushima, Noriaki, 2013. "The arm's length principle and tacit collusion," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 119-130.
    7. Lemus Torres, Ana Belén, 2011. "Strategic incentives for kepping one set of books under the Arm's Length Principle," UC3M Working papers. Economics we1135, Universidad Carlos III de Madrid. Departamento de Economía.
    8. Edward Johnson & Nicole Bastian Johnson & Thomas Pfeiffer, 2016. "Dual transfer pricing with internal and external trade," Review of Accounting Studies, Springer, vol. 21(1), pages 140-164, March.
    9. Alonso-Pauli, Eduard & Bru, Lluís, 2018. "Strategic delegation in procurement," MPRA Paper 84293, University Library of Munich, Germany.
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    11. Jung, Se-Youn & Huh, Woonghee Tim & Park, Kun Soo, 2022. "Impact of the arm’s length regulation on a supply chain with asymmetric retailers," European Journal of Operational Research, Elsevier, vol. 300(3), pages 865-883.
    12. Lemus Torres, Ana Belén & Moreno, Diego, 2011. "The non-neutrality of the arm's length principle with imperfect competition," UC3M Working papers. Economics we1134, Universidad Carlos III de Madrid. Departamento de Economía.
    13. Sunil Dutta & Stefan Reichelstein, 2010. "Decentralized capacity management and internal pricing," Review of Accounting Studies, Springer, vol. 15(3), pages 442-478, September.
    14. Romana L. Autrey & Francesco Bova & David A. Soberman, 2014. "Organizational Structure and Gray Markets," Marketing Science, INFORMS, vol. 33(6), pages 849-870, November.
    15. Chongwoo Choe & Noriaki Matsushima, 2012. "The Arm’s Length Principle and Tacit Collusion," Monash Economics Working Papers 02-12, Monash University, Department of Economics.

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