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Strategic Transfer Pricing With Risk-Averse Agents

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  • Robert F. Göx
  • Jens Robert Schöndube

Abstract

In this paper we analyze strategic transfer pricing with risk- and effort-averse divisional managers. In contrast to earlier literature, we find that the existence of a standard agency problem allows transfer pricing to serve as a commitment device even if the transfer prices are not mutually observable. The reason is that transfer prices are set above marginal cost to solve the agency problem and not for strategic purposes. Therefore, delegating the pricing authority to a risk-averse manager implies that he sets a higher product price than does the risk-neutral owner, because at the divisional level the transfer price represents the relevant unit cost for pricing. We show that the optimal scope of managerial authority generally depends on both the risk premium and the intensity of competition in the product market. We also identify conditions under which the delegation of pricing responsibilities to risk-averse managers constitutes a dominant strategy equilibrium.

Suggested Citation

  • Robert F. Göx & Jens Robert Schöndube, 2004. "Strategic Transfer Pricing With Risk-Averse Agents," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 56(2), pages 98-118, April.
  • Handle: RePEc:sbr:abstra:v:56:y:2004:i:2:p:98-118
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    Cited by:

    1. Jan Thomas Martini & Rainer Niemann & Dirk Simons, 2007. "Transfer Pricing or Formula Apportionment? Tax-Induced Distortions of Multinationals’ Investment and Production Decisions," CESifo Working Paper Series 2020, CESifo Group Munich.

    More about this item

    Keywords

    Agency Theory; Duopoly Theory; Strategic Transfer Pricing.;

    JEL classification:

    • D49 - Microeconomics - - Market Structure, Pricing, and Design - - - Other
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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