The Generalized Nash Bargaining Solution for Transfer Price Negotiations Under Incomplete Information

Claus-Jochen Haake () and Sonja Recker ()
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Claus-Jochen Haake: Paderborn University
Sonja Recker: Paderborn University

Group Decision and Negotiation, 2018, vol. 27, issue 6, No 2, 905-932

Abstract: Abstract In our model two divisions negotiate over type-dependent contracts to determine an intrafirm transfer price for an intermediate product. Since the upstream division’s (seller’s) costs and downstream division’s (buyer’s) revenues are supposed to be private information, we formally consider cooperative bargaining problems under incomplete information. This means that the two divisions consider allocations of expected utility generated by mechanisms that satisfy (interim) individual rationality, incentive compatibility and/or ex post efficiency. Assuming two possible types for buyer and seller each, we first establish that the bargaining problem is regular, regardless whether or not incentive and/or efficiency constraints are imposed. This allows us to apply the generalized Nash bargaining solution to determine fair transfer payments and transfer quantities. In particular, the generalized Nash bargaining solution tries to balance divisional profits, while incentive constraints are still in place. In that sense a fair profit division is generated. Furthermore, by means of illustrative examples we derive general properties of this solution for the transfer pricing problem and compare the model developed here with the models existing in the literature. We demonstrate that there is a tradeoff between ex post efficiency and fairness.

Keywords: Cooperative bargaining; Generalized Nash bargaining solution; Transfer pricing; Incomplete information (search for similar items in EconPapers)
JEL-codes: C78 D82 M41 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10726-018-9592-8

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