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Strategic Transfer Pricing

Author

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  • 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)

Abstract

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.

Suggested Citation

  • Michael Alles & Srikant Datar, 1998. "Strategic Transfer Pricing," Management Science, INFORMS, vol. 44(4), pages 451-461, April.
    • Handle: RePEc:inm:ormnsc:v:44:y:1998:i:4:p:451-461
    DOI: 10.1287/mnsc.44.4.451
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    References listed on IDEAS

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    1. Chaim Fershtman & Kenneth L. Judd, 2006. "Equilibrium Incentives in Oligopoly: Corrigendum," American Economic Review, American Economic Association, vol. 96(4), pages 1367-1367, September.
    2. Holmstrom, Bengt & Tirole, Jean, 1991. "Transfer Pricing and Organizational Form," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(2), pages 201-228, Fall.
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    4. Ronen, J & Balachandran, Kr, 1988. "An Approach To Transfer Pricing Under Uncertainty," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 26(2), pages 300-314.
    5. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    6. Ronen, J & Mckinney, G, 1970. "Transfer Pricing For Divisional Autonomy," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 8(1), pages 99-112.
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