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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Strategic transfer pricing, absorption costing and vertical integration
Organization Unit
Authors
  • Robert Göx
Language
  • English
Institution University of Zurich
Series Name SSRN
Number 98661
ISSN 1556-5068
Date 1998
Abstract Text 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.
Free access at DOI
Digital Object Identifier 10.2139/ssrn.98661
Other Identification Number merlin-id:8264
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