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Decomposition, Pricing for Decentralization and External Economies

Author

Listed:
  • William J. Baumol

    (Princeton University)

  • Tibor Fabian

    (MATHEMATICA, Princeton, New Jersey and University of Pennsylvania)

Abstract

The decomposition procedure for the solution of large scale linear programs is described in an elementary manner with illustrative calculations. Its economic interpretation as a procedure for decentralized decision by the multi-division firm or the multi-sector economy is explained in detail. Decomposition is shown to provide internal prices for decentralized decision making in the presence of external economies or diseconomies. However, it is demonstrated that in many cases there exist no prices which will lead divisions to make independent decisions that are optimal from the point of view of the company (or the economy) as a whole.

Suggested Citation

  • William J. Baumol & Tibor Fabian, 1964. "Decomposition, Pricing for Decentralization and External Economies," Management Science, INFORMS, vol. 11(1), pages 1-32, September.
  • Handle: RePEc:inm:ormnsc:v:11:y:1964:i:1:p:1-32
    DOI: 10.1287/mnsc.11.1.1
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    File URL: http://dx.doi.org/10.1287/mnsc.11.1.1
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    Cited by:

    1. Rosenthal, Edward C., 2008. "A game-theoretic approach to transfer pricing in a vertically integrated supply chain," International Journal of Production Economics, Elsevier, vol. 115(2), pages 542-552, October.
    2. Terry A. Ferrar & Peter Sassone, 1975. "The Political Economy of Effluent Charges," Eastern Economic Journal, Eastern Economic Association, vol. 2(3), pages 266-273, July.
    3. Erickson, Gary M., 2012. "Transfer pricing in a dynamic marketing-operations interface," European Journal of Operational Research, Elsevier, vol. 216(2), pages 326-333.
    4. Corbett, Charles J. & Debets, Frank J.C. & Van Wassenhove, Luk N., 1995. "Decentralization of responsibility for site decontamination projects: A budget allocation approach," European Journal of Operational Research, Elsevier, vol. 86(1), pages 103-119, October.
    5. Meijboom, B.R., 1983. "Decomposition-based planning procedures," Other publications TiSEM 5abab508-b9b6-4748-88f3-2, Tilburg University, School of Economics and Management.
    6. Jens Leth Hougaard & Jørgen Tind, 2013. "Cost Allocation with Limited Information," MSAP Working Paper Series 01_2013, University of Copenhagen, Department of Food and Resource Economics.
    7. Kriens, J. & van Lieshout, J.T.H.C. & Roemen, J.H.J. & Verheyen, P.A., 1983. "Management accounting and operational research," Other publications TiSEM da4f2baa-f699-48f2-80b7-8, Tilburg University, School of Economics and Management.
    8. Meijboom, B.R., 1986. "Planning in decentralized firms : a contribution to the theory on multilevel decisions," Other publications TiSEM 291e5a70-7bb8-4de3-be1f-0, Tilburg University, School of Economics and Management.
    9. Villegas, F. & Ouenniche, J., 2008. "A general unconstrained model for transfer pricing in multinational supply chains," European Journal of Operational Research, Elsevier, vol. 187(3), pages 829-856, June.
    10. Hajime Eto, 2003. "Interdisciplinary information input and output of a nano-technology project," Scientometrics, Springer;Akadémiai Kiadó, vol. 58(1), pages 5-33, September.
    11. Elendner, Thomas & Femerling, R., 2003. "Allocation of in-house services: Experimental comparison of allocation mechanisms," Manuskripte aus den Instituten für Betriebswirtschaftslehre der Universität Kiel 577, Christian-Albrechts-Universität zu Kiel, Institut für Betriebswirtschaftslehre.
    12. Kaneko, Ikuyo, 1984. "Global Optimization in a Decentralized Decision Making Process," Hitotsubashi Journal of commerce and management, Hitotsubashi University, vol. 19(1), pages 40-54, October.
    13. Hax, Arnoldo C. & Meal, Harlan C., 1973. "Hierarchical integration of production planning and scheduling," Working papers 656-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    14. Wiley, Victor D. & Deckro, Richard F. & Jackson, Jack A., 1998. "Optimization analysis for design and planning of multi-project programs," European Journal of Operational Research, Elsevier, vol. 107(2), pages 492-506, June.
    15. Pfeiffer, Thomas, 1999. "Transfer pricing and decentralized dynamic lot-sizing in multistage, multiproduct production processes," European Journal of Operational Research, Elsevier, vol. 116(2), pages 319-330, July.
    16. Avila, Marcos & Ronen, Joshua, 1999. "Transfer-pricing mechanisms: An experimental investigation," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 689-715, July.
    17. Sendil K. Ethiraj & Daniel Levinthal, 2009. "Hoping for A to Z While Rewarding Only A: Complex Organizations and Multiple Goals," Organization Science, INFORMS, vol. 20(1), pages 4-21, February.
    18. Mulvey, John M. & Erkan, Hafize G., 2006. "Applying CVaR for decentralized risk management of financial companies," Journal of Banking & Finance, Elsevier, vol. 30(2), pages 627-644, February.
    19. Jornsten, Kurt & Leisten, Rainer, 1995. "Decomposition and iterative aggregation in hierarchical and decentralised planning structures," European Journal of Operational Research, Elsevier, vol. 86(1), pages 120-141, October.
    20. Goedhart, Marc H. & Spronk, Jaap, 1995. "An interactive heuristic for financial planning in decentralized organizations," European Journal of Operational Research, Elsevier, vol. 86(1), pages 162-175, October.

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