IDEAS home Printed from https://ideas.repec.org/p/mos/moswps/2010-20.html
   My bibliography  Save this paper

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

Author

Listed:
  • Wenli Cheng
  • Dingsheng Zhang

Abstract

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.

Suggested Citation

  • Wenli Cheng & Dingsheng Zhang, 2010. "The Arm’s Length Principle, Transfer Pricing and Foreclosure under Imperfect Competition," Monash Economics Working Papers 20-10, Monash University, Department of Economics.
  • Handle: RePEc:mos:moswps:2010-20
    as

    Download full text from publisher

    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2010/2010armslengthchengzhang.pdf
    Download Restriction: no

    More about this item

    Keywords

    Crime Victimisation; Institutions; Happiness; Ordered Probit; Rule of Law.;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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). General contact details of provider: http://edirc.repec.org/data/dxmonau.html .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.