Strategic Transfer Pricing

Michael Alles and Srikant Datar
Additional contact information
Michael Alles: CBA 4M-202, University of Texas at Austin, Austin, Texas 78712
Srikant Datar: Harvard Business School, Accounting and Control Area, Soldier's Field, Boston, Massachusetts 02163

Management Science, 1998, vol. 44, issue 4, 451-461

Abstract: Most research into cost systems has focused on their motivational implications. This paper takes a different approach, by developing a model where two oligopolistic firms strategically select their cost-based transfer prices. Duopoly models frequently assume that firms game on their choice of prices. Product prices, however, are ultimately based on the firms' transfer prices that communicate manufacturing costs to marketing departments. It is for this reason that transfer prices will have a strategic component to them. We derive implications for cost system choice and transfer pricing, including showing that firms may cross subsidize their products---a result consistent with the empirical evidence.

Keywords: transfer pricing; full cost allocation; incentives; costing (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (56)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:44:y:1998:i:4:p:451-461

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