Transfer Pricing for Coordination and Profit Determination: An Analysis of Alternative Schemes

Martini JT (2005) Discussion paper / Fakultät für Wirtschaftswissenschaften, Universität Bielefeld; 534.
Bielefeld: Universität Bielefeld.

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Transfer pricing is a well-known instrument in decentralized firms. We focus on the common situation of a 'single book' where the same transfer price is employed to coordinate divisions and to determine their profits. Assuming that a transfer price has to satisfy the arm's length principle, we first argue that such a transfer price is either negotiated between the divisions before (ex ante) or set by headquarters after (ex post) divisional activities have been decided. Based on a model of a firm with two divisions, the paper analytically derives the corresponding divisional profits. Thereby, we account for exogenously as well as endogenously determined transfer pricing schemes. It is shown that the resulting divisional profits strongly depend on the different settings: For instance, under negotiated transfer prices, divisional profits are always Pareto efficient but substantially vary with the scheme, whereas there may occur Pareto inefficient divisional profits that are invariant with the scheme when transfer prices are administered by headquarters. In the latter case, an advance pricing agreement may serve as an effective remedy. The results clarify the effects of alternative transfer pricing schemes and of the choice between them.
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Martini JT. Transfer Pricing for Coordination and Profit Determination: An Analysis of Alternative Schemes. Discussion paper / Fakultät für Wirtschaftswissenschaften, Universität Bielefeld. Vol 534. Bielefeld: Universität Bielefeld; 2005.
Martini, J. T. (2005). Transfer Pricing for Coordination and Profit Determination: An Analysis of Alternative Schemes (Discussion paper / Fakultät für Wirtschaftswissenschaften, Universität Bielefeld, 534). Bielefeld: Universität Bielefeld.
Martini, J. T. (2005). Transfer Pricing for Coordination and Profit Determination: An Analysis of Alternative Schemes. Discussion paper / Fakultät für Wirtschaftswissenschaften, Universität Bielefeld, 534, Bielefeld: Universität Bielefeld.
Martini, J.T., 2005. Transfer Pricing for Coordination and Profit Determination: An Analysis of Alternative Schemes, Discussion paper / Fakultät für Wirtschaftswissenschaften, Universität Bielefeld, no.534, Bielefeld: Universität Bielefeld.
J.T. Martini, Transfer Pricing for Coordination and Profit Determination: An Analysis of Alternative Schemes, Discussion paper / Fakultät für Wirtschaftswissenschaften, Universität Bielefeld, vol. 534, Bielefeld: Universität Bielefeld, 2005.
Martini, J.T.: Transfer Pricing for Coordination and Profit Determination: An Analysis of Alternative Schemes. Discussion paper / Fakultät für Wirtschaftswissenschaften, Universität Bielefeld, 534. Universität Bielefeld, Bielefeld (2005).
Martini, Jan Thomas. Transfer Pricing for Coordination and Profit Determination: An Analysis of Alternative Schemes. Bielefeld: Universität Bielefeld, 2005. Discussion paper / Fakultät für Wirtschaftswissenschaften, Universität Bielefeld. 534.
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