Optimal transfer prices and technology in decentralized business groups

60 Pages Posted: 8 Jun 2022 Last revised: 29 Dec 2022

See all articles by Stefano Nasini

Stefano Nasini

Catholic University of Lille - IÉSEG School of Management, Lille Campus

Marijn Verschelde

Catholic University of Lille - IÉSEG School of Management, Lille Campus; Ghent University - Department of General Economics

Bruno Merlevede

Ghent University - Department of General Economics

Date Written: June 3, 2022

Abstract

Decentralized (parent-affiliates) business groups encompass independent firms sharing production resources under common administrative or financial control. In this paper, we propose a single-leader-multi-follower game where a parent firm (the leader) operates in a competitive single-product market and delegates production to profit-maximizing affiliate firms (the followers). With a view to provide an operational tool for the management of decentralized business groups, the proposed model integrates transfer prices and investment in intangible resources, as incentive mechanisms driving affiliates' production decisions. Based on the parent's control of the value chain, two model specifications and solution approaches are presented: full delegation and partial delegation. For the former, we provide an exact characterization of the equilibrium solution, whereas for business groups operating under partial delegation, we provide tight lower and upper bounds, computable by state-of-the-art optimization methods. As empirically shown using a customized version of the Orbis data set focusing on 40 European parent firms, our methodology not only uncovers how optimal transfer prices and technology are dependent on the parent's control of the value chain, but also gives rise to a computational approach that is efficiently applicable to a wide range of decentralized (parent-affiliates) business groups.

Keywords: Decentralized production, Technology sharing, Leader-follower game, Bilevel programming

JEL Classification: C61, D24, M11, C44

Suggested Citation

Nasini, Stefano and Verschelde, Marijn and Merlevede, Bruno, Optimal transfer prices and technology in decentralized business groups (June 3, 2022). Available at SSRN: https://ssrn.com/abstract=4127144 or http://dx.doi.org/10.2139/ssrn.4127144

Stefano Nasini (Contact Author)

Catholic University of Lille - IÉSEG School of Management, Lille Campus ( email )

Socle de la Grande Arche
1 Parvis de la Defense
Lille, Lille 59000
France

HOME PAGE: http://https://www.ieseg.fr/

Marijn Verschelde

Catholic University of Lille - IÉSEG School of Management, Lille Campus ( email )

3 rue de la Digue
Lille, 59000
France

Ghent University - Department of General Economics ( email )

Hoveniersberg 24
Ghent, 9000
Belgium

Bruno Merlevede

Ghent University - Department of General Economics ( email )

Tweekerkenstraat 2
Ghent, 9000
Belgium

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