Transfer Pricing—Heterogeneous Agents and Learning Effects

Abstract

In this paper we analyze the impact of heterogeneous agents and learning effects on negotiated transfer prices and the consolidated profit resulting at firm level. An agent-based simulation is employed to show potential results implied by learning and interaction effects between negotiating profit centers. In particular, intra-company profit centers can choose to trade with each other or with independent parties on an external market. Since the profit centers have incomplete and heterogeneous information about this external market, they are involved in a bargaining process with outside options. To achieve a maximized comprehensive income it may be favourable on profit center level or even on firm level to choose outside options. In the long run the intracompany option should be favourable on all levels, as it excludes the profit orientated external market. We investigate our agents’ behaviour under different parameter settings regarding the incentive system set by the company-wide management. Results show how learning effects and different incentive systems affect the decision making process with respect to the firm’s overall objective.