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Strategic Transfer Pricing

Author

Listed:
  • 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
    as

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    File URL: http://dx.doi.org/10.1287/mnsc.44.4.451
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    References listed on IDEAS

    as
    1. Holmstrom, Bengt & Tirole, Jean, 1991. "Transfer Pricing and Organizational Form," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(2), pages 201-228, Fall.
    2. 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.
    3. repec:bla:joares:v:26:y:1988:i:2:p:300-314 is not listed on IDEAS
    4. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    5. repec:bla:joares:v:8:y:1970:i:1:p:99-112 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

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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. Das, K. & Sengupta, S., 2009. "A hierarchical process industry production-distribution planning model," International Journal of Production Economics, Elsevier, vol. 117(2), pages 402-419, February.
    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. Choe, Chongwoo & Matsushima, Noriaki, 2013. "The arm's length principle and tacit collusion," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 119-130.
    5. Matsui, Kenji, 2011. "Intrafirm trade, arm's-length transfer pricing rule, and coordination failure," European Journal of Operational Research, Elsevier, vol. 212(3), pages 570-582, August.
    6. repec:eee:joacli:v:31:y:2013:i:1:p:31-48 is not listed on IDEAS
    7. Thépot, Jacques & Netzer, Jean-Luc, 2008. "On the optimality of the full-cost pricing," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 282-292, October.
    8. Matsui, Kenji, 2012. "Strategic upfront marketing channel integration as an entry barrier," European Journal of Operational Research, Elsevier, vol. 220(3), pages 865-875.
    9. Ni, Jian & Chu, Lap Keung & Wu, Feng & Sculli, Domenic & Shi, Yuan, 2012. "A multi-stage financial hedging approach for the procurement of manufacturing materials," European Journal of Operational Research, Elsevier, vol. 221(2), pages 424-431.
    10. Edward Johnson & Nicole Bastian Johnson & Thomas Pfeiffer, 2016. "Dual transfer pricing with internal and external trade," Review of Accounting Studies, Springer, vol. 21(1), pages 140-164, March.
    11. Kenji Matsui, 2012. "Auditing internal transfer prices in multinationals under monopolistic competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(6), pages 800-818, December.
    12. Lambert, Richard A., 2001. "Contracting theory and accounting," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 3-87, December.
    13. repec:otg:wpaper:1403 is not listed on IDEAS
    14. Alonso-Pauli, Eduard & Bru, Lluís, 2018. "Strategic delegation in procurement," MPRA Paper 84293, University Library of Munich, Germany.
    15. Elges, Carsten, 2016. "Die Preissetzung in Unternehmenskooperationen: Erste spieltheoretische Überlegungen," Arbeitspapiere 162, University of Münster, Institute for Cooperatives.
    16. Liu, Guowei & Zhang, Jianxiong & Tang, Wansheng, 2015. "Strategic transfer pricing in a marketing–operations interface with quality level and advertising dependent goodwill," Omega, Elsevier, vol. 56(C), pages 1-15.
    17. Gramlich, Jacob P. & Ray, Korok, 2015. "Reconciling Full-Cost and Marginal-Cost Pricing," Finance and Economics Discussion Series 2015-72, Board of Governors of the Federal Reserve System (U.S.).

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