Abstract
This paper applies a modified, truth‐revealing Ronen‐McKinney (1970)/Groves‐Loeb (1976) intrafirm transfer pricing mechanism for interdependent products to evaluate the relative economies of alternative organizational structures. In particular, the mechanism's communication efficiency is compared for two common organizational structures: (i) product‐line divisionalization and (ii) functional divisionalization. While there are no differences in communication efficiency for the two organizational forms when independent products are involved, the analysis suggests that product‐line divisionalization provides for more efficient communication than functional divisionalization when interdependent products are involved.
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