Transfer prices for air force component repair decisions

Laura H. Baldwin * and Glenn A. Gotz

Defence and Peace Economics, 2004, vol. 15, issue 1, 59-69

Abstract: In 1992, the Air Force implemented transfer pricing to manage repair decisions for most reparable components. This market-like system is intended to provide internal customers with incentives to make cost-effective repair decisions; namely, repair a broken part locally versus sending it to a repair depot. However, Air Force transfer prices diverge from marginal costs along a number of dimensions and, thereby, provide incentives to behave in ways that minimize private costs but increase system costs. An alternative structure that would cause customers to face the costs their decisions impose upon the support system is recommended.

Date: 2004
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DOI: 10.1080/1024269042000164496

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