Strategic Transfer Pricing With Risk-Averse Agents

Robert Göx and Jens Robert Schöndube

Schmalenbach Business Review (sbr), 2004, vol. 56, issue 2, 98-118

Abstract: In this paper we analyze strategic transfer pricing with risk- and effort-averse divisional managers. In contrast to earlier literature, we find that the existence of a standard agency problem allows transfer pricing to serve as a commitment device even if the transfer prices are not mutually observable. The reason is that transfer prices are set above marginal cost to solve the agency problem and not for strategic purposes. Therefore, delegating the pricing authority to a risk-averse manager implies that he sets a higher product price than does the risk-neutral owner, because at the divisional level the transfer price represents the relevant unit cost for pricing. We show that the optimal scope of managerial authority generally depends on both the risk premium and the intensity of competition in the product market. We also identify conditions under which the delegation of pricing responsibilities to risk-averse managers constitutes a dominant strategy equilibrium.

Keywords: Agency Theory; Duopoly Theory; Strategic Transfer Pricing. (search for similar items in EconPapers)
JEL-codes: D49 D82 L13 M40 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (2)

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