Complete Proofs to Theorems in 'Information Technology, Organizational Design, and Transfer Pricing'

26 Pages Posted: 6 Mar 2006

See all articles by Shane S. Dikolli

Shane S. Dikolli

Darden School of Business University of Virginia

Igor Vaysman

CUNY Baruch College, Zicklin School of Business

Date Written: March 2, 2006

Abstract

This note contains complete proofs to the four theorems in Dikolli and Vaysman (2006) "Information technology, organizational design, and transfer pricing." In a setting where a production department can only coarsely communicate private information to a marketing department, Theorem 1 establishes conditions under which the firm maximizes expected profit under cost-based transfer pricing. Theorem 2 specifies conditions under which the firm's expected profit under negotiated transfer pricing is strictly higher than under cost-based transfer pricing. Theorem 3 demonstrates how with a sufficiently fine information system, the ordering can switch: cost-based transfer pricing allows the firm to generate a higher expected profit than with negotiated pricing. Finally, in a setting where both production and marketing are able to communicate only coarse information, Theorem 4 identifies conditions under which negotiated pricing allows the firm to generate a higher expected profit than with cost-based pricing.

Keywords: Cost-based transfer pricing, Negotiated transfer pricing, Bargaining, Decentralization

JEL Classification: C72, D82, L23, M41, M46

Suggested Citation

Dikolli, Shane Sami and Vaysman, Igor, Complete Proofs to Theorems in 'Information Technology, Organizational Design, and Transfer Pricing' (March 2, 2006). Available at SSRN: https://ssrn.com/abstract=887732 or http://dx.doi.org/10.2139/ssrn.887732

Shane Sami Dikolli

Darden School of Business University of Virginia ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
4342431018 (Phone)

Igor Vaysman (Contact Author)

CUNY Baruch College, Zicklin School of Business ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3207 (Phone)

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