Decentralization, Transfer Pricing and Tacit Collusion
University of Connecticut Department of Economics
University of Zurich
June 1, 2006
Contemporary Accounting Research (2009, Vol. 26, No. 2, pp. 581-604)
Research in accounting traditionally regards transfer pricing as an intra-firm transaction problem. Within the context of a simple Cournot model, we demonstrate that firms can use transfer prices strategically as a collusive device. While firms are individually better off from a centralized organizational form with each internal division transferring intermediate goods at marginal cost, all firms benefit from a collusive agreement to organize along profit centers, transferring goods above marginal cost. This collusion yields roughly twice the competitive profits and is sustainable even when price or quantity collusion is not. This practice may also escape legal scrutiny while the same cost-shifting between regulated monopolists and their corporate affiliates is regarded as a major concern for regulators and researchers.
Number of Pages in PDF File: 21
Keywords: transfer pricing, collusion, strategic delegation, vertical integration
JEL Classification: K21, M41
Date posted: July 31, 2006 ; Last revised: October 4, 2012
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