Abstract
We develop a dynamic control model of a monopolist composed of two profit centers, e.g., an operations department in charge of the product innovation and a marketing department controlling advertising effort as well as the retail price. Meanwhile, knowledge accumulating in product innovation and advertising effort which lead to reducing the corresponding investment cost is considered. The customer inverse demand function depends jointly on the quality level as well as the product goodwill which can be improved by product innovation and advertising efforts. Our results show that the learning rates of product innovation and advertising effort affect the product innovation and advertising effort investments level. In addition, compared with the administered transfer-pricing, the negotiation between the two departments results in a lower transfer price as well as a higher retail price. In the meantime, the advertising effort is lower while the quality improvement effort is higher. What is more, higher profits to both departments and the firm can be brought about by the negotiation means.
Highlights
Nowadays, more and more firms have been building divisional organizations to utilize the distinctive advantages of decentralized decision-making
We develop a dynamic control model of a monopolist composed of two profit centers, e.g., an operations department in charge of the product innovation and a marketing department controlling advertising effort as well as the retail price
Our results show that the learning rates of product innovation and advertising effort affect the product innovation and advertising effort investments level
Summary
More and more firms have been building divisional organizations to utilize the distinctive advantages of decentralized decision-making. The effects of two kinds of knowledge accumulation on transfer-pricing decision-making are investigated, e.g., knowledge accumulation through learning by doing in product innovation carried out by the operations department and advertising effort activities performed by the marketing department. We analyze the decentralized issue, in which we investigate the negotiated and administered transfer-pricing in turn. Our results show that the learning rates of product innovation and advertising effort affect the product innovation and advertising effort investments level, and compared with the administered transfer price, the negotiation between the two departments leads to a lower transfer price as well as a higher retail price. The negotiated transfer-pricing leads to higher profits to both departments and the firm
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