Virtual Transfer Price Negotiations: Unintended Interactions with Incentive Systems

Abstract

Despite decades of research concerning the impact of computer-mediated communication (CMC) on decision-making, the potential interaction with the organization's management control system has just recently received attention. Media naturalness theory is used to develop hypotheses concerning the interactions of communication medium with the incentive pay scheme, a ubiquitous aspect of management control systems. A laboratory experiment was used to examine the interactions between two treatments: face-to-face negotiations versus virtual (computer-mediated) negotiations and cooperative versus competitive incentive pay schemes. Buyer-seller dyads negotiated the price and quantity of the transferred goods. Results indicate that while virtual negotiations are more efficient in terms of time than face-to-face negotiations, there is not a significant interaction with the incentive pay scheme for efficiency. However, results also indicate that virtual negotiations are less effective in terms of optimal quantity (organizational profit) than face-to-face, and that there is a significant interaction with the incentive pay scheme. Virtual negotiations have the unintended consequence of reducing the effectiveness (organizational profitability) of the negotiations.