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Decentralization and Transfer Pricing Under Oligopoly

  • Laixun Zhao

This paper presents a simple model of a partially decentralized multinational firm (MNF) in competition with a rival firm. It is shown that transfer pricing can be used as a rent-shifting device by the MNF to compete with the rival. This arises because the MNF headquarters uses the transfer price to manage different subsidiaries. The specific value of the transfer price chosen by the MNF depends on whether the rival firm produces the intermediate good, the final good, or both and whether the rival is integrated or not. In particular, both decentralization and competition with a fully integrated rival result in lower transfer prices.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 67 (2000)
Issue (Month): 2 (July)
Pages: 414-426

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Handle: RePEc:sej:ancoec:v:67:2:y:2000:p:414-426
Contact details of provider: Web page: http://www.southerneconomic.org/
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