Abstract
This paper compares the relative performance of alternative transfer pricing schemes. In our model, the transfer pricing method determines the quantity of an intermediate good to be traded. In addition, the transfer price generates incentives for the divisions to undertake specific investments in order to lower production costs or to raise revenues for the final product. If the transfer price is determined through negotiation between the profit center managers, both divisions tend to underinvest. However, for the case of linear cost functions and linear marginal revenue curves, we find that negotiated transfer pricing generally achieves higher expected firm profits than a scheme which bases the transfer price upon a standard costs quote issued by the selling division.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callMore From: Schmalenbachs Zeitschrift für betriebswirtschaftliche Forschung
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
