Complete Proofs to Theorems in 'Information Technology, Organizational Design, and Transfer Pricing'
26 Pages Posted: 6 Mar 2006
Date Written: March 2, 2006
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: Suggested Citation