The Armâ€™s Length Principle, Transfer Pricing and Foreclosure under Imperfect Competition
Abstract: This paper studies a multinational firmâ€™s transfer price decisions in imperfectly competitive market settings. It investigates whether the firmâ€™s optimal transfer price coincides with the armâ€™s length price and examines how the firm might respond if it is compelled to follow the armâ€™s length principle. The main findings are: (1) in the absence of tax transfer incentives, the firmâ€™s optimal transfer price does not coincide with the armâ€™s length price. If the firm is compelled to follow the armâ€™s length principle, it has an incentive to circumvent the armâ€™s length principle by keeping two sets of books, one for internal management, and another for tax reporting purposes; (2) the armâ€™s length principle can affect the MNFâ€™s decision on whether or not to foreclose its competitor. Absent profit shifting incentives, the firm will foreclose its downstream competitor. Imposing the armâ€™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 firmâ€™s upstream and downstream divisions face different tax rates, the firmâ€™s foreclosure decision will be reversed if the armâ€™s length principle is enforced.
|Date of creation:||May 2010|
|Contact details of provider:|| Postal: Department of Economics, Monash University, Victoria 3800, Australia|
Web page: http://business.monash.edu/economics
More information through EDIRC
|Order Information:|| Web: http://www.buseco.monash.edu.au/eco/research/papers/ Email: |
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.