Contributions published at Managerial Accounting (Robert Göx)

This paper analyzes the efficiency of three simple cost-based pricing heuristics in a twoperiod capacity planning model with uncertain demand. All policies start with full cost introductory prices but differ in second-period pricing. Under “adaptive full-cost pricing”, the firm updates second-period prices on the basis of current demand conditions and full unit costs. Under “wait-and-see pricing”, the firm sets second-period prices on the basis of updated demand information and current opportunity cost of capacity. Under “myopic fullcost pricing”, prices remain constant for both periods. Although we identify one special case for which all three heuristics replicate the optimal solution, we find that “wait-and-see pricing” dominates “adaptive full-cost pricing”, which dominates its ‘myopic’ counterpart. However, we also discuss factors that may justify the use of ‘full-cost pricing’ in real-world planning environments. We note that if the firm faces significant information and/or communication costs, or if price changes will probably only occur in the far future, even the simple “myopic full-cost pricing” heuristic may be a reasonable policy.

The paper considers a two stage capacity and production planning model under uncertainty. The optimal second stage production policy falls into three cases: When capacity is slack the firm will produce with the cost minimizing production rate and adjust the production time to meet its output target. When the capacity constraint is binding, the firm will first adjust the production rate and then again produce with a constant production rate but employ overtime to meet the output target. The optimal capacity choice of the first stage is determined by the trade off between the sunk costs of slack labor and the expected opportunity costs of adjusting the production rate and employing overtime in the case of a binding capacity constraint. The key item determining the firm’s labor demand is the overtime premium. The amount of contracted labor strictly increases with the overtime premium and the expected overtime strictly decreases. Since then latter effect dominates the former for small overtime premia, the firm’s labor demand is first decreasing and then increasing with the overtime premium. A reduction of overtime premia can be Pareto improving because it does not only lead to substantial cost savings but also an increasing labor demand.

This paper analyses the use of transfer pricing as a strategic device in divisionalized firms facing duopolistic price competition. When transfer prices are observable, both firms’ headquarters will charge a transfer price above the marginal cost of the intermediate product to induce their marketing managers to behave as softer competitors in the final product market. When transfer prices are not observable, strategic transfer pricing is not an equilibrium and the optimal transfer price equals the marginal cost of the intermediate product. As a strategic alternative, however, the firms can signal the use of transfer prices above marginal cost to their competitors by a publicly observable commitment to an absorption costing system. The paper identifies conditions under which the choice of absorption costing is a dominant strategy equilibrium.

This paper compares the performance of transfer pricing and tidy cost allocations in a multiproduct firm in presence of output market competition and production externalities. In absence of competition, tidy cost allocations are creating inefficient allocations within the firm while transfer prices can always be adjusted to replicate the first best solution of the centralized firm. While the second result is well known, the first result draws a parallel to the impossibility of solving the free rider problem in team production by a profit sharing scheme. Under duopolistic competition, transfer prices are still the best accounting rule but the solution depends on the nature of competition on the final product market. When firms compete in prices, the strategic rationale requires to allocate more than the total cost of the congested service to the duopolistic departments. While transfer prices can still be adjusted accordingly, the tidiness requirement prevents the cost allocation scheme from providing the desired strategic incentives to the firms' managers. Under quantity competition, the strategic motive requires to allocate less than the cost of the service to the duopolistic departments. Although a tidy cost allocation scheme does not contradict the required direction of the strategic effect, the optimal allocation is at best found incidentally while the transfer prices can again always be adjusted in an optimal way.

This paper analyzes the impact of capacity costs on bidding strategies of firms participating in procurement auctions. More efficient firms will invest in advance due to their high probability of winning the auction while less efficient bidders prefer to wait with their investments until the outcome of the auction is known. However, in equilibrium both types of firms include a coverage for their investment costs in their bids and therefore adopt a full cost pricing policy.

This paper analyzes the use of transfer pricing as a strategic device in divisionalized firms facing duopolistic price competition. When transfer prices are observable, both firms' headquarters will exclude their marketing division from the external input market and charge a transfer price above the market price of the intermediate product to induce their marketing managers to behave as softer competitors on the final product market. When transfer prices are not observable, strategic transfer pricing is not an equilibrium, and the optimal transfer price equals the market price of the intermediate product. As an alternative, the firms can signal their competitor a transfer price above the market price of the intermediate input through a proper choice of their accounting system. The paper identifies conditions under which the choice of absorption costing is a dominant strategy for both firms. Moreover, when the firms' products are close substitutes, the strategic benefits of full cost based transfer pricing can provide incentives to maintain a production department that would not be able to survive as a separate firm in the long run.

Economic literature has proposed several incentive mechanisms in order to induce agents in divisionalized organizations to reveal their private information. Among these mechanisms the class of Groves mechanisms has the distinguishing property of implementing truthful reporting as an equilibrium in dominant strategies. However, critiques maintain that agents may collude and transmit false information to headquarters. This paper demonstrates that the agents' collusion game results in a prisoners' dilemma because agents cannot credibly commit themselves to play the collusive message strategies. The paper also outlines an organizational setting to enhance the plausibility of the fundamental assumptions underlying the Groves/Loeb approach, in which payoffs are observable ex post so that compensation contracts can be based on them. The task of informing headquarters is not assigned to the division manager himself but to a pertinent management accountant. This setting reduces the impact of subjective utility components of agents' payoffs so that the assumptions of this mechanism seem more realistic.

One of the major functions of transfer pricing is the optimal coordination of internal trade between responsibility centers in decentralized firms. According to standard theory the efficient level of internal trade is achieved by marginal cost pricing. If one of the firm's profit centers faces duopolistic competition on the final product market, the firm's headquarters can gain a strategic advantage when it systematically distorts the transfer price. Because headquarters cannot credibly commit to the equilibrium strategy that is induced by transfer pricing, the market outcome achieved by strategic transfer pricing cannot be replicated by centralized decision making. Since unobservable contracts cannot serve as credible precommitments unless they are employed for other than strategic reasons, the applicability of the basic concept is limited to observable transfer prices. When transfer prices are unobservable and the firms are facing price competition, however, the desired strategic advantages can also be achieved by a commitment to a full-cost system or by the delegation of the authority over the terms of internal trade to the producing division.