Information Technology, Organizational Design, and Transfer Pricing
61 Pages Posted: 7 Mar 2006 Last revised: 27 Feb 2015
Date Written: June 2, 2005
We show how information technology affects transfer pricing. With coarse information technology, negotiated transfer pricing has an informational advantage: managers agree to prices that approximate the firm's cost of internal trade more precisely than cost-based transfer prices. With sufficiently rapid offers, this advantage outweighs opportunity costs of managers' bargaining time, and negotiated transfer pricing generates higher profits than the cost-based method. However, as information technology improves, the informational advantage diminishes; the opportunity costs of managers' bargaining eventually dominate, and cost-based methods generate higher profits. Our results explain why firms generally prefer cost-based methods, and when negotiated methods are preferable.
Keywords: Cost-based transfer pricing, Negotiated transfer pricing, Bargaining, Decentralization
JEL Classification: C72, D82, L23, M40, M46
Suggested Citation: Suggested Citation