The Arm’s Length Principle and Tacit Collusion

18 Pages Posted: 17 Jan 2012

See all articles by Chongwoo Choe

Chongwoo Choe

Monash University - Department of Economics

Noriaki Matsushima

Osaka University - Institute of Social and Economic Research (ISER)

Date Written: January 4, 2012

Abstract

The arm’s length principle states that the transfer price between two associated enterprises should be the price that would be paid for similar goods in similar circumstances by unrelated parties dealing at arm’s length with each other. This paper examines the effect of the arm’s length principle on dynamic competition in imperfectly competitive markets. It is shown that the arm’s length principle renders tacit collusion more stable. This is true whether firms have exclusive dealings with unrelated parties or compete for the demand from unrelated parties.

Keywords: Transfer price, arm’s length principle, tacit collusion, stability of collusion

JEL Classification: D43, L13, L41

Suggested Citation

Choe, Chongwoo and Matsushima, Noriaki, The Arm’s Length Principle and Tacit Collusion (January 4, 2012). Available at SSRN: https://ssrn.com/abstract=1986387 or http://dx.doi.org/10.2139/ssrn.1986387

Chongwoo Choe (Contact Author)

Monash University - Department of Economics ( email )

Department of Economics
PO Box 197
Caulfield East, Victoria 3145
Australia
+61 2 9903 1125 (Phone)
+61 2 9903 1128 (Fax)

Noriaki Matsushima

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan

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