Abstract

http://ssrn.com/abstract=1351883
 
 

References (29)



 
 

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Gray Markets and Multinational Transfer Pricing


Romana L. Autrey


University of Illinois at Urbana-Champaign - Department of Accountancy

Francesco Bova


University of Toronto - Rotman School of Management

July 20, 2011

Harvard Business School Accounting & Management Unit Working Paper No. 09-098
Accounting Review, Forthcoming

Abstract:     
Gray markets arise when a manufacturer’s products are sold outside of its authorized channels, for instance when goods designated by a multinational firm for sale in a foreign market are resold domestically. One method multinationals use to combat gray markets is to increase transfer prices to foreign subsidiaries in order to increase the gray market’s cost base. We illustrate that, when a gray market competitor exists, the optimal transfer price to a foreign subsidiary exceeds marginal cost and is decreasing in the competitiveness of the domestic market. However, a multinational’s discretion in setting transfer prices may be limited by mandatory arm’s length transfer pricing rules. Provided gray markets exist, we characterize when mandating arm’s length transfer pricing lowers domestic social welfare relative to unrestricted transfer pricing. We also demonstrate that gray markets can lead to higher domestic tax revenues, even when gray market firms do not pay taxes domestically.

Number of Pages in PDF File: 51

Keywords: Transfer pricing, gray markets, regulation

JEL Classification: M41, D43, F23

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Date posted: March 6, 2009 ; Last revised: July 23, 2011

Suggested Citation

Autrey, Romana L. and Bova, Francesco, Gray Markets and Multinational Transfer Pricing (July 20, 2011). Harvard Business School Accounting & Management Unit Working Paper No. 09-098; Accounting Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1351883

Contact Information

Romana L. Autrey
University of Illinois at Urbana-Champaign - Department of Accountancy ( email )
1206 South Sixth Street
Champaign, IL 61820
United States
Francesco Bova (Contact Author)
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-978-3985 (Phone)
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