Market-Based Transfer Prices and Intracompany Discounts

32 Pages Posted: 22 Mar 1999

See all articles by Tim Baldenius

Tim Baldenius

Columbia Buiness School

Aaron S. Edlin

University of California at Berkeley; National Bureau of Economic Research (NBER)

Stefan J. Reichelstein

Stanford University - Stanford Graduate School of Business; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 1999

Abstract

Firms frequently value internal transactions at external market prices subject to an intracompany discount. These discounts are generally explained by cost differences between internal and external sales. In a model where the supplying division has monopoly power in the external market, we find that cost differences are neither necessary nor sufficient for intracompany discounts to be desirable. The imposition of discounts always increases the divisional profits of the buying division, but may also lower the divisional profits of the selling division. We derive conditions for discounts to enhance firm-wide profit. We also study the sensitivity of the optimal discount to cost differences between internal and external transactions. Under certain conditions, market-based transfer prices subject to optimally chosen discounts perform well. If the buying division sells its final product in a competitive market and if demand and cost parameters are positively correlated, then market-based transfer pricing induces the divisions to engage in transactions which are nearly efficient from the corporate perspective.

JEL Classification: M40, M46, L22

Suggested Citation

Baldenius, Tim and Edlin, Aaron S. and Reichelstein, Stefan J., Market-Based Transfer Prices and Intracompany Discounts (February 1999). Available at SSRN: https://ssrn.com/abstract=155650 or http://dx.doi.org/10.2139/ssrn.155650

Tim Baldenius (Contact Author)

Columbia Buiness School ( email )

3022 Broadway
New York, NY 10027
United States

Aaron S. Edlin

University of California at Berkeley ( email )

Dept of Economics 549 Evans Hall #3880
Berkeley, CA 94720
United States
510-642-4719 (Phone)
510-643-0413 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stefan J. Reichelstein

Stanford University - Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-1129 (Phone)
650-725-7979 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Register to save articles to
your library

Register

Paper statistics

Downloads
1,058
Abstract Views
4,170
rank
20,021
PlumX Metrics