An Evaluation of Alternative Market-Based Transfer Prices

Author(s)

Nicole Bastian Johnson, Clemens Löffler, Thomas Pfeiffer

Abstract

We investigate a transfer pricing problem between two divisions within a decentralized firm. An upstream division produces an intermediate good that is used by another division within the firm and is also sold in an external market, where the firm competes with a rival selling a differentiated substitute product. Assuming that headquarters has imperfect information about the upstream division's private information and that communication is restricted, we identify conditions under which the firm will prefer a market-based transfer price based on the market price set by the firm's rival rather than on the market price set by the upstream division. The two transfer prices affect the price-setting incentives of the upstream division and its rival differently, and convey different levels of private-cost information to the downstream division, which impacts internal trade efficiency. The relative performance of the two transfer pricing regimes depends on the relative size of internal versus external demand for the upstream division's good and on the degree of uncertainty about the upstream division's costs. Overall, our analysis provides new insights about how alternative market-based transfer prices can coordinate decentralized decision-making in the absence of a perfectly competitive intermediate market.

Organisation(s)

Department of Accounting, Innovation and Strategy

External organisation(s)

University of Oregon, Wirtschaftsuniversität Wien (WU)

Journal

Contemporary Accounting Research

Volume

35

Pages

1868-1887

No. of pages

20

ISSN

0823-9150

DOI

https://doi.org/10.1111/1911-3846.12358

Publication date

10-2017

Peer reviewed

Yes

Austrian Fields of Science 2012

502006 Controlling

Keywords

ASJC Scopus subject areas

Economics and Econometrics, Accounting, Finance

Portal url

https://ucrisportal.univie.ac.at/en/publications/044306c5-b237-4462-8454-9490fe92fed1