UZH-Logo

Maintenance Infos

Strategic transfer pricing, absorption costing and vertical integration


Göx, Robert F (1998). Strategic transfer pricing, absorption costing and vertical integration. Social Science Research Network 98661, SSRN.

Abstract

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.

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.

Altmetrics

Downloads

26 downloads since deposited on 05 Jul 2013
8 downloads since 12 months
Detailed statistics

Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:1998
Deposited On:05 Jul 2013 09:12
Last Modified:05 Apr 2016 16:51
Series Name:Social Science Research Network
ISSN:1556-5068
Publisher DOI:https://doi.org/10.2139/ssrn.98661
Other Identification Number:merlin-id:8264
Permanent URL: https://doi.org/10.5167/uzh-79187

Download

[img]
Preview
Filetype: PDF
Size: 325kB
View at publisher

TrendTerms

TrendTerms displays relevant terms of the abstract of this publication and related documents on a map. The terms and their relations were extracted from ZORA using word statistics. Their timelines are taken from ZORA as well. The bubble size of a term is proportional to the number of documents where the term occurs. Red, orange, yellow and green colors are used for terms that occur in the current document; red indicates high interlinkedness of a term with other terms, orange, yellow and green decreasing interlinkedness. Blue is used for terms that have a relation with the terms in this document, but occur in other documents.
You can navigate and zoom the map. Mouse-hovering a term displays its timeline, clicking it yields the associated documents.

Author Collaborations