The double marginalization problem of transfer pricing: Theory and experiment
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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- 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.
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