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.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Baldenius T (2000) Intrafirm trade, bargaining power, and specific investments. Rev Acc Stud 5(1): 27–56
Baldenius T, Reichelstein S, Sahay SA (1999) Negotiated versus cost-based-transfer pricing. Rev Acc Stud 4(2): 67–91
Böckem S, Schiller U (2008) Option contracts in supply chains. J Econ Manag Strategy 17(1): 219–245
Ben-Shahar O, White JJ (2006) Boilerplate and economic power in auto manufacturing contracts. Mich Law Rev 104(5): 953–982
Brandenburger A, Stuart H (2007) Biform games. Manag Sci 53(4): 537–549
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 229–339
Chwolka A, Simons D (2003) Impacts of revenue sharing, profit sharing, and transfer pricing on quality-improving investments. Eur Acc Rev 12(1): 47–76
Chwolka A, Martini JT, Simons D (2010) The value of negotiating cost-based transfer prices. BuR-Bus Res 3(2): 113–131
Dikolli SS, Vaysman I (2006) Information technology, organizational design, and transfer pricing. J Acc Econ 41(1-2): 201–234
Drury C (2004) Management and cost accounting, 6th edn. Thomson Learning, London
Eccles RG (1985) The transfer pricing problem: a theory for practice. Lexington Books, Lexington
Edlin AS, Reichelstein S (1995) Specific investment under negotiated transfer pricing: an efficiency result. Acc Rev 70(2): 275–291
Edlin AS, Reichelstein S (1996) Holdups, standard breach remedies, and optimal investment. Am Econ Rev 86(3): 478–501
Haake CJ, Martini JT (2011) Negotiating transfer prices. Working paper, http://ssrn.com/abstract=1297203
Hanany E, Kilgour DM, Gerchak Y (2007) Final-offer arbitration and risk aversion in bargaining. Manag Sci 53(11): 1785–1792
Hart O, Moore J (1988) Incomplete contracts and renegotiation. Econometrica 56(4): 755–785
Hart O, Moore J (1999) Foundations of incomplete contracts. Rev Econ Stud 66(1): 115–138
Hirshleifer J (1956) On the economics of transfer pricing. J Bus 29(3): 172–184
Holmstrom B, Tirole J (1991) Transfer pricing and organizational form. J Law Econ Organ 7(2): 201–228
Hoogaard JL, Tvede M (2003) Nonconvex n-person bargaining: efficient maxmin solutions. Econ Theory 21: 81–95
Johnson NB (2006) Divisional performance measurement and transfer pricing for intangible assets. Rev Acco Stud 11(2/3): 339–365
Kalai E, Smorodinsky M (1975) Other solutions to nash’s bargaining problem. Econometrica 43: 513–518
Nagarajan M, Sošić G (2008) Game-theoretic analysis of cooperation among supply chain agents: review and extensions. Eur J Oper Res 187(3): 719–745
Nash JF (1950) The bargaining problem. Econometrica 18(1): 155–162
Nash JF (1953) Two-person cooperative games. Econometrica 21(1): 128–140
Peters HJM (1992) Axiomatic bargaining game theory, theory and decision library (Series C), vol 9. Kluwer, Dordrecht
Rawls J (2005) A theory of justice. Harvard University Press, reissue edition
Rosenmüller J (2000) Game theory: stochastics, information, strategies, and cooperation. Kluwer, Boston
Schmalenbach E (1909) Über Verrechnungspreise. Zeitschrift für handelswissenschaftliche Forschung 1908/1909(3):165–185
Smith M (2002) Ex ante and ex post discretion over arm’s length transfer prices. Acc Rev 77(1): 161–184
Tang RYW (1993) Transfer pricing in the 1990s: tax and management perspectives. Quorum Books, Westport
Tirole J (1999) Incomplete contracts: where do we stand. Econometrica 67(4): 741–781
Vaysman I (1998) A model of negotiated transfer pricing. J Acc Econ 25(3): 349–384
Wagenhofer A (1994) Transfer pricing under asymmetric information: an evaluation of alternative methods. Eur Acc Rev 3(1): 71–103
Waterhouse P (1984) Transfer pricing practices of american industry. Price Waterhouse, New York
Wielenberg S (2000) Negotiated transfer pricing, specific investment, and optimal capacity choice. Rev Acc Stud 5(3): 197–216
Williamson OE (1985) The economic institutions of capitalism: firms, markets, relational contracting. The Free Press, New York
Author information
Authors and Affiliations
Corresponding author
Additional information
The authors thank Hermann Jahnke, Ulf Schiller, and Stefan Wielenberg for helpful comments on an earlier version of the paper. Two anonymous referees and the editor William F. Samuelson helped to clarify the paper significantly.
Rights and permissions
About this article
Cite this article
Haake, CJ., Martini, J.T. Negotiating Transfer Prices. Group Decis Negot 22, 657–680 (2013). https://doi.org/10.1007/s10726-012-9286-6
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10726-012-9286-6