Dual transfer pricing with internal and external trade

Edward Johnson (), Nicole Bastian Johnson () and Thomas Pfeiffer ()
Additional contact information
Edward Johnson: 1208 University of Oregon
Nicole Bastian Johnson: 1208 University of Oregon
Thomas Pfeiffer: University of Vienna

Review of Accounting Studies, 2016, vol. 21, issue 1, No 4, 140-164

Abstract: Abstract This paper examines a transfer pricing problem between two divisions of a decentralized firm. The selling division is privately informed about its own costs and produces a good that is sold both externally in an intermediate market and internally within the firm. Unlike most previous work, we focus on dual transfer pricing systems that allow the selling division to be credited for an amount that differs from the amount charged to the buying division. We identify conditions under which efficient decentralized trade and external price setting incentives can be provided with a properly chosen set of dual transfer prices that do not rely on direct communication. Instead, the optimal dual transfer prices will depend only on public information about the market price charged by the upstream division in the external market, which indirectly communicates information about production costs to the downstream division. For a variety of well-known demand functions, the optimal transfer prices will be linear functions of the market price. Our main results hold when the upstream division faces multiple internal buyers or faces a binding capacity constraint.

Keywords: Dual transfer pricing; Market-based transfer pricing; Decentralized decision-making (search for similar items in EconPapers)
JEL-codes: D24 D82 M41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11142-015-9343-x

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