Negotiated Transfer Pricing: Is Fairness Easier Said than Done?

Abstract

Questionnaire responses reported by Luft and Libby (1997) reveal that transfer price negotiators expect fairness-based price concessions that moderate the influence of an outside market price when the outside market price strongly favors one of the parties. We examine whether these expectations of fairness extend to the actual prices that result from real-cash negotiations. Findings indicate that expectations of fairness-based price concessions do not survive actual negotiations when participants negotiate over a computer network with no communication other than bids, asks, and acceptances. Conversely, both expectations and actual negotiated outcomes reflect fairness-based price concessions when participants negotiate in a face-to-face setting with unrestricted communication. Together, these results imply that the extent to which questionnaire-based judgments of social behavior generalize to actual behavior depends on the whether the competitive environment suppresses or reinforces the social presence necessary to sustain phenomena such as preferences for fairness.

Keywords: Transfer pricing; Fairness; Negotiation

JEL Classification: M40, M46