Cooperative Transfer Price Negotiations under Incomplete Information

Sonja Brangewitz () and Claus-Jochen Haake ()
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Sonja Brangewitz: University of Paderborn

No 64, Working Papers CIE from Paderborn University, CIE Center for International Economics

Abstract: In this paper, we analyze a model in which two divisions negotiate over an intrafirm transfer price for an intermediate product. Formally, we consider bargaining problems under incomplete information, since the upstream division’s (seller's) costs and downstream division's (buyer's) revenues are supposed to be private information. Assuming two possible types for buyer and seller each, we first establish that the bargaining problem is regular, regardless whether incentive and/or efficiency constraints are imposed. This allows us to apply the generalized Nash bargaining solution to determine transfer payments and transfer probabilities. Furthermore, we derive general properties of this solution for the transfer pricing problem and compare the model developed here with the existing literature for negotiated transfer pricing under incomplete information. In particular, we focus on the models presented in Wagenhofer (1994).

Keywords: Transfer Pricing; Negotiation; Generalized Nash Bargaining Solution; Incomplete Information (search for similar items in EconPapers)
JEL-codes: C78 D82 M41 (search for similar items in EconPapers)
Pages: 29
Date: 2013-07
New Economics Papers: this item is included in nep-cta, nep-gth and nep-mic
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Citations: View citations in EconPapers (1)

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