Strategic Transfer Pricing with Risk Averse Agents

Schmalenbach Business Review, Vol. 56, April 2004

21 Pages Posted: 28 Jun 2004

See all articles by Robert F. Göx

Robert F. Göx

University of Zurich - Department of Business Administration (IBW); University of Zurich - Managerial Accounting; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Jens Robert Schöndube

Leibniz Universität Hannover

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Abstract

This paper analyzes strategic transfer pricing with risk and effort averse divisional managers. In contrast to earlier literature, we find that the existence of a standard agency problem allows transfer pricing to serve as a commitment device even if the transfer prices are not mutually observable. The reason is that transfer prices are set above marginal cost to solve the agency problem and not for strategic purposes. Delegating the pricing authority to a risk averse manager therefore implies that he sets a higher product price than the risk neutral owner because at the divisional level the transfer price represents the relevant unit cost for pricing. We show that the optimal scope of managerial authority generally depends on both, the risk premium and the intensity of competition in the product market. We also identify conditions under which the delegation of pricing responsibilities to risk averse managers constitutes a dominant strategy equilibrium.

Keywords: Strategic transfer pricing, agency theory, duopoly theory

JEL Classification: D49, D82, L13, M40, M46

Suggested Citation

Goex, Robert F. and Schöndube, Jens Robert, Strategic Transfer Pricing with Risk Averse Agents. Schmalenbach Business Review, Vol. 56, April 2004, Available at SSRN: https://ssrn.com/abstract=555122

Robert F. Goex (Contact Author)

University of Zurich - Department of Business Administration (IBW) ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland

University of Zurich - Managerial Accounting ( email )

Plattenstrasse 14
Zurich, CH-8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Jens Robert Schöndube

Leibniz Universität Hannover ( email )

30167
Germany

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