Advertisement

Group Decision and Negotiation

, Volume 22, Issue 4, pp 657–680 | Cite as

Negotiating Transfer Prices

  • Claus-Jochen Haake
  • Jan Thomas Martini
Article

Abstract

We consider a team-investment setting in which transfer prices between two divisions are negotiable. Investments are made independently and simultaneously after the bargaining stage, i.e. with a given transfer price ‘on the table’. Both divisions’ investments jointly affect the sales price of the final product and total revenue. We analyze two transfer-pricing schemes and their corresponding bargaining problems. Both bargaining settings exhibit non-transferable utility because the transfer price not only allocates corporate profit but also affects corporate profit through the incentives it creates for the divisions’ investment and quantity decisions. In particular, we discuss how concepts from bargaining theory can be use used to determine a ‘fair’ agreement concerning the transfer price.

Keywords

Transfer pricing Negotiation Nash bargaining Kalai-Smorodinsky solution Fairness Incomplete contracts Revenue sharing 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Baldenius T (2000) Intrafirm trade, bargaining power, and specific investments. Rev Acc Stud 5(1): 27–56CrossRefGoogle Scholar
  2. Baldenius T, Reichelstein S, Sahay SA (1999) Negotiated versus cost-based-transfer pricing. Rev Acc Stud 4(2): 67–91CrossRefGoogle Scholar
  3. Böckem S, Schiller U (2008) Option contracts in supply chains. J Econ Manag Strategy 17(1): 219–245CrossRefGoogle Scholar
  4. Ben-Shahar O, White JJ (2006) Boilerplate and economic power in auto manufacturing contracts. Mich Law Rev 104(5): 953–982Google Scholar
  5. Brandenburger A, Stuart H (2007) Biform games. Manag Sci 53(4): 537–549CrossRefGoogle Scholar
  6. Cachon GP (2003) Supply chain coordination with contracts. In: de Kok A, Graves SC (eds) Supply chain management: design, coordination and operation, Chap. 6. Elsevier, Amsterdam, pp 229–339Google Scholar
  7. Chwolka A, Simons D (2003) Impacts of revenue sharing, profit sharing, and transfer pricing on quality-improving investments. Eur Acc Rev 12(1): 47–76CrossRefGoogle Scholar
  8. Chwolka A, Martini JT, Simons D (2010) The value of negotiating cost-based transfer prices. BuR-Bus Res 3(2): 113–131Google Scholar
  9. Dikolli SS, Vaysman I (2006) Information technology, organizational design, and transfer pricing. J Acc Econ 41(1-2): 201–234CrossRefGoogle Scholar
  10. Drury C (2004) Management and cost accounting, 6th edn. Thomson Learning, LondonGoogle Scholar
  11. Eccles RG (1985) The transfer pricing problem: a theory for practice. Lexington Books, LexingtonGoogle Scholar
  12. Edlin AS, Reichelstein S (1995) Specific investment under negotiated transfer pricing: an efficiency result. Acc Rev 70(2): 275–291Google Scholar
  13. Edlin AS, Reichelstein S (1996) Holdups, standard breach remedies, and optimal investment. Am Econ Rev 86(3): 478–501Google Scholar
  14. Haake CJ, Martini JT (2011) Negotiating transfer prices. Working paper, http://ssrn.com/abstract=1297203
  15. Hanany E, Kilgour DM, Gerchak Y (2007) Final-offer arbitration and risk aversion in bargaining. Manag Sci 53(11): 1785–1792CrossRefGoogle Scholar
  16. Hart O, Moore J (1988) Incomplete contracts and renegotiation. Econometrica 56(4): 755–785CrossRefGoogle Scholar
  17. Hart O, Moore J (1999) Foundations of incomplete contracts. Rev Econ Stud 66(1): 115–138CrossRefGoogle Scholar
  18. Hirshleifer J (1956) On the economics of transfer pricing. J Bus 29(3): 172–184CrossRefGoogle Scholar
  19. Holmstrom B, Tirole J (1991) Transfer pricing and organizational form. J Law Econ Organ 7(2): 201–228Google Scholar
  20. Hoogaard JL, Tvede M (2003) Nonconvex n-person bargaining: efficient maxmin solutions. Econ Theory 21: 81–95CrossRefGoogle Scholar
  21. Johnson NB (2006) Divisional performance measurement and transfer pricing for intangible assets. Rev Acco Stud 11(2/3): 339–365CrossRefGoogle Scholar
  22. Kalai E, Smorodinsky M (1975) Other solutions to nash’s bargaining problem. Econometrica 43: 513–518CrossRefGoogle Scholar
  23. Nagarajan M, Sošić G (2008) Game-theoretic analysis of cooperation among supply chain agents: review and extensions. Eur J Oper Res 187(3): 719–745CrossRefGoogle Scholar
  24. Nash JF (1950) The bargaining problem. Econometrica 18(1): 155–162CrossRefGoogle Scholar
  25. Nash JF (1953) Two-person cooperative games. Econometrica 21(1): 128–140CrossRefGoogle Scholar
  26. Peters HJM (1992) Axiomatic bargaining game theory, theory and decision library (Series C), vol 9. Kluwer, DordrechtCrossRefGoogle Scholar
  27. Rawls J (2005) A theory of justice. Harvard University Press, reissue editionGoogle Scholar
  28. Rosenmüller J (2000) Game theory: stochastics, information, strategies, and cooperation. Kluwer, BostonGoogle Scholar
  29. Schmalenbach E (1909) Über Verrechnungspreise. Zeitschrift für handelswissenschaftliche Forschung 1908/1909(3):165–185Google Scholar
  30. Smith M (2002) Ex ante and ex post discretion over arm’s length transfer prices. Acc Rev 77(1): 161–184CrossRefGoogle Scholar
  31. Tang RYW (1993) Transfer pricing in the 1990s: tax and management perspectives. Quorum Books, WestportGoogle Scholar
  32. Tirole J (1999) Incomplete contracts: where do we stand. Econometrica 67(4): 741–781CrossRefGoogle Scholar
  33. Vaysman I (1998) A model of negotiated transfer pricing. J Acc Econ 25(3): 349–384CrossRefGoogle Scholar
  34. Wagenhofer A (1994) Transfer pricing under asymmetric information: an evaluation of alternative methods. Eur Acc Rev 3(1): 71–103CrossRefGoogle Scholar
  35. Waterhouse P (1984) Transfer pricing practices of american industry. Price Waterhouse, New YorkGoogle Scholar
  36. Wielenberg S (2000) Negotiated transfer pricing, specific investment, and optimal capacity choice. Rev Acc Stud 5(3): 197–216CrossRefGoogle Scholar
  37. Williamson OE (1985) The economic institutions of capitalism: firms, markets, relational contracting. The Free Press, New YorkGoogle Scholar

Copyright information

© Springer Science+Business Media B.V. 2012

Authors and Affiliations

  1. 1.Department of Business Administration and EconomicsUniversity of PaderbornPaderbornGermany
  2. 2.Department of Business Administration and EconomicsBielefeld UniversityBielefeldGermany

Personalised recommendations