The Value of Negotiating Cost-Based Transfer Prices

BuR Business Research Journal, Vol. 3, No. 2, November 2010

19 Pages Posted: 6 Nov 2010

See all articles by Anne Chwolka

Anne Chwolka

Otto-von_Guericke University of Magdeburg

Jan Thomas Martini

Bielefeld University - Department of Business Administration and Economics

Dirk Simons

University of Mannheim - Accounting and Taxation

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Date Written: November 5, 2010

Abstract

This paper analyzes the potential of one-step transfer prices based on either variable or full costs for coordinating decentralized production and quality-improving investment decisions. Transfer prices based on variable costs fail to induce investments on the upstream stage. In contrast, transfer prices based on full costs provide strong investment incentives for the upstream divisions. However, they fail to coordinate the investment decisions. We show that negotiations prevent such coordination failure. In particular, we find that the firm benefits from a higher degree of decentralization so that total profit increases in the number of parameters being subject to negotiations.

Keywords: transfer pricing, centralized management, decentralized management, investment, product differentiation, negotiations

Suggested Citation

Chwolka, Anne and Martini, Jan Thomas and Simons, Dirk, The Value of Negotiating Cost-Based Transfer Prices (November 5, 2010). BuR Business Research Journal, Vol. 3, No. 2, November 2010, Available at SSRN: https://ssrn.com/abstract=1703333

Anne Chwolka (Contact Author)

Otto-von_Guericke University of Magdeburg ( email )

Universitätspl. 2
PSF 4120
Magdeburg, D-39106
Germany

Jan Thomas Martini

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

HOME PAGE: http://www.wiwi.uni-bielefeld.de/lehrbereiche/bwl/ctrl/martini

Dirk Simons

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

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