IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

The Arm’s Length Principle, Transfer Pricing and Foreclosure under Imperfect Competition

  • Wenli Cheng
  • Dingsheng Zhang

Abstract: This paper studies a multinational firm’s transfer price decisions in imperfectly competitive market settings. It investigates whether the firm’s optimal transfer price coincides with the arm’s length price and examines how the firm might respond if it is compelled to follow the arm’s length principle. The main findings are: (1) in the absence of tax transfer incentives, the firm’s optimal transfer price does not coincide with the arm’s length price. If the firm is compelled to follow the arm’s length principle, it has an incentive to circumvent the arm’s length principle by keeping two sets of books, one for internal management, and another for tax reporting purposes; (2) the arm’s length principle can affect the MNF’s decision on whether or not to foreclose its competitor. Absent profit shifting incentives, the firm will foreclose its downstream competitor. Imposing the arm’s length principle induces the firm to supply its competitor, but the firm can revert to its foreclosure decision by keeping two sets of books. If the firm’s upstream and downstream divisions face different tax rates, the firm’s foreclosure decision will be reversed if the arm’s length principle is enforced.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 20-10.

in new window

Length: 20 pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:mos:moswps:2010-20
Contact details of provider: Postal: Department of Economics, Monash University, Victoria 3800, Australia
Phone: +61-3-9905-2493
Fax: +61-3-9905-5476
Web page:

More information through EDIRC

Order Information: Web: Email:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:mos:moswps:2010-20. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Simon Angus)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.