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Transfer Pricing in a Decentralized Firm

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  • Jerome E. Hass

    (Cornell University)

Abstract

Ronald Howard's editorial comments in the June, 1967 volume of this journal stressed the power of the pricing mechanism in the control and optimization of social systems. This article illustrates how such a concept can be applied via a decomposition algorithm for quadratic programming. A set of artificial markets for scarce resources and transfer goods is introduced into a model of a divisionalized firm and a quadratic decomposition algorithm is used to find the optimal (profit maximizing) set of prices for these goods. The algorithm requires a minimal amount of information transmission from the divisions to corporate headquarters and can be applied to divisionalized firms operating in imperfect markets. It also has significant behavioral implications not found in other decomposition algorithms for the firm which employs a profit-center method of control. The value of the algorithm is evident in those situations where decentralization is either desirable or a necessity and where interdependencies exist.

Suggested Citation

  • Jerome E. Hass, 1968. "Transfer Pricing in a Decentralized Firm," Management Science, INFORMS, vol. 14(6), pages 310-331, February.
    • Handle: RePEc:inm:ormnsc:v:14:y:1968:i:6:p:b310-b331
    DOI: 10.1287/mnsc.14.6.B310
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    Cited by:

    1. 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.
    2. Michael Olbrich & David J. Rapp & Florian Follert, 2022. "Eugen Schmalenbach, Austrian economics, and German business economics," Post-Print hal-02891111, HAL.
    3. 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.
    4. Erickson, Gary M., 2012. "Transfer pricing in a dynamic marketing-operations interface," European Journal of Operational Research, Elsevier, vol. 216(2), pages 326-333.
    5. T W Ruefli & J E Storbeck, 1982. "Behaviorally Linked Location Hierarchies," Environment and Planning B, , vol. 9(3), pages 257-268, September.
    6. Michael Olbrich & David J. Rapp & Florian Follert, 2022. "Eugen Schmalenbach, Austrian economics, and German business economics," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 35(2), pages 205-233, June.
    7. Avila, Marcos & Ronen, Joshua, 1999. "Transfer-pricing mechanisms: An experimental investigation," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 689-715, July.
    8. Peter C. Dawson & Stephen M. Miller, 2009. "International Transfer Pricing for Goods and Intangible Asset Licenses in a Decentralized Multinational Corporation: Review and Extensions," Working Papers 0901, University of Nevada, Las Vegas , Department of Economics.

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