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Brand proliferation and inter-brand competition: The strategic role of transfer pricing

Author

Listed:
  • Leonard Fong-Sheng Wang
  • Ya-Chin Wang

Abstract

Purpose - This paper first attempts to analyze the issue of brand proliferation by a monopolist allowing transfer pricing as a channel to bridge headquarters and brand divisions, and then to view how the headquarters uses transfer pricing as a strategic device to encounter intra-brand competition, inter-brand competition and cross-border profit-shifting under an oligopolistic market. Design/methodology/approach - This paper models cross-country interactions in a Cournot-Nash framework, and characterizes equilibrium that involves both transfer pricing and output decision. MNE's behavior is based on a two-stage process in which the centralized headquarters' prior action on setting transfer pricing is to backup the decentralized subsidiaries in their output decision-making. Findings - It is demonstrated that MNEs have the incentive to manipulate their transfer prices in order to shift profit cross-border. Higher transfer pricing enables brand divisions to collude easier in the intra-brand competition model, and the level of transfer price hinges upon the strength of intra-brand competition and inter-brand competition. In addition, transfer pricing is affected by tax differences between two countries. Originality/value - This paper provides the theoretical underpinning to see how headquarters may use transfer pricing as a strategic device to face intra- and inter-brand competition that is visibly evident in many diverse industries.

Suggested Citation

  • Leonard Fong-Sheng Wang & Ya-Chin Wang, 2008. "Brand proliferation and inter-brand competition: The strategic role of transfer pricing," Journal of Economic Studies, Emerald Group Publishing, vol. 35(3), pages 278-292, August.
  • Handle: RePEc:eme:jespps:v:35:y:2008:i:3:p:278-292
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