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Intrafirm Trade, Bargaining Power, and Specific Investments

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  • Tim Baldenius

    (Columbia University)

Abstract

This paper compares the performance of standard-cost with negotiated transfer pricing under asymmetric information. Negotiated transfer pricing generally achieves higher expected contribution margins, as this method tends to be more efficient in aggregating private information into a single transfer price. Standard-cost transfer pricing confers more bargaining power to the supplier and therefore generates better incentives for this division to undertake specific investments. The opposite holds for buyer investments. If a corporate controller has disaggregated information about divisional costs and revenues, then the firm can improve upon the performance of standard-cost transfer pricing by setting a centralized transfer price equal to expected cost plus a suitably chosen mark-up.

Suggested Citation

  • Tim Baldenius, 2000. "Intrafirm Trade, Bargaining Power, and Specific Investments," Review of Accounting Studies, Springer, vol. 5(1), pages 27-56, March.
    • Handle: RePEc:spr:reaccs:v:5:y:2000:i:1:d:10.1023_a:1009612901910
    DOI: 10.1023/A:1009612901910
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