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Decentralization, Transfer Pricing and Tacit Collusion

21 Pages Posted: 31 Jul 2006 Last revised: 4 Oct 2012

Mikhael Shor

University of Connecticut Department of Economics

Hui Chen

University of Zurich

Date Written: June 1, 2006

Abstract

Research in accounting traditionally regards transfer pricing as an intra-firm transaction problem. Within the context of a simple Cournot model, we demonstrate that firms can use transfer prices strategically as a collusive device. While firms are individually better off from a centralized organizational form with each internal division transferring intermediate goods at marginal cost, all firms benefit from a collusive agreement to organize along profit centers, transferring goods above marginal cost. This collusion yields roughly twice the competitive profits and is sustainable even when price or quantity collusion is not. This practice may also escape legal scrutiny while the same cost-shifting between regulated monopolists and their corporate affiliates is regarded as a major concern for regulators and researchers.

Keywords: transfer pricing, collusion, strategic delegation, vertical integration

JEL Classification: K21, M41

Suggested Citation

Shor, Mikhael and Chen, Hui, Decentralization, Transfer Pricing and Tacit Collusion (June 1, 2006). Contemporary Accounting Research (2009, Vol. 26, No. 2, pp. 581-604) . Available at SSRN: https://ssrn.com/abstract=921379 or http://dx.doi.org/10.2139/ssrn.921379

Mikhael Shor

University of Connecticut Department of Economics ( email )

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

HOME PAGE: http://www.mikeshor.com/

Hui Chen (Contact Author)

University of Zurich ( email )

Plattenstrasse 14
Zurich, CH-8032
Switzerland

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