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Strategic Transfer Pricing

  • Michael Alles

    (CBA 4M-202, University of Texas at Austin, Austin, Texas 78712)

  • Srikant Datar

    (Harvard Business School, Accounting and Control Area, Soldier's Field, Boston, Massachusetts 02163)

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    Most research into cost systems has focused on their motivational implications. This paper takes a different approach, by developing a model where two oligopolistic firms strategically select their cost-based transfer prices. Duopoly models frequently assume that firms game on their choice of prices. Product prices, however, are ultimately based on the firms' transfer prices that communicate manufacturing costs to marketing departments. It is for this reason that transfer prices will have a strategic component to them. We derive implications for cost system choice and transfer pricing, including showing that firms may cross subsidize their products---a result consistent with the empirical evidence.

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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 44 (1998)
    Issue (Month): 4 (April)
    Pages: 451-461

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    Handle: RePEc:inm:ormnsc:v:44:y:1998:i:4:p:451-461
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    1. Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Holmstrom, Bengt & Tirole, Jean, 1991. "Transfer Pricing and Organizational Form," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(2), pages 201-28, Fall.
    3. M. Harris & C. H. Kriebel & A. Raviv, 1982. "Asymmetric Information, Incentives and Intrafirm Resource Allocation," Management Science, INFORMS, vol. 28(6), pages 604-620, June.
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