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The double marginalization problem of transfer pricing: Theory and experiment

  • Lantz, Björn
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    In this paper, we find that the idea of using optional two-part tariffs as a basis for tariff renegotiations in a bilaterally monopoly setting is a solution to the double marginalization problem that theoretically (1) creates a stable equilibrium, (2) at the overall efficient level, (3) without the presence of a central management. Through experimental testing, we find that the efficiency of this mechanism is significantly higher than the efficiency of simple direct negotiation, both under symmetrically and asymmetrically distributed information.

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    File URL: http://www.sciencedirect.com/science/article/B6VCT-4S85DHY-1/2/cc8effff1ab381ec4a138ac5339c7095
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    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 196 (2009)
    Issue (Month): 2 (July)
    Pages: 434-439

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    Handle: RePEc:eee:ejores:v:196:y:2009:i:2:p:434-439
    Contact details of provider: Web page: http://www.elsevier.com/locate/eor

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    1. Economides, Nicholas, 1999. "Quality choice and vertical integration," International Journal of Industrial Organization, Elsevier, vol. 17(6), pages 903-914, August.
    2. Dejong, Douglas V. & Forsythe, Robert & Kim, Jae-Oh & Uecker, Wilfred C., 1989. "A laboratory investigation of alternative transfer pricing mechanisms," Accounting, Organizations and Society, Elsevier, vol. 14(1-2), pages 41-64, January.
    3. Avila, Marcos & Ronen, Joshua, 1999. "Transfer-pricing mechanisms: An experimental investigation," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 689-715, July.
    4. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
    5. Jack Hirshleifer, 1956. "On the Economics of Transfer Pricing," The Journal of Business, University of Chicago Press, vol. 29, pages 172.
    6. Abel P. Jeuland & Steven M. Shugan, 1983. "Managing Channel Profits," Marketing Science, INFORMS, vol. 2(3), pages 239-272.
    7. David Sibley, 1989. "Asymmetric Information, Incentives and Price-Cap Regulation," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 392-404, Autumn.
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