Strategic Transfer Pricing, Absorption Costing and Vertical Integration

29 Pages Posted: 7 Jul 1998

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

Date Written: May 28, 1998

Abstract

This paper analyzes the use of transfer pricing as a strategic device in divisionalized firms facing duopolistic price competition. When transfer prices are observable, both firms' headquarters will exclude their marketing division from the external input market and charge a transfer price above the market price of the intermediate product to induce their marketing managers to behave as softer competitors on the final product market. When transfer prices are not observable, strategic transfer pricing is not an equilibrium, and the optimal transfer price equals the market price of the intermediate product. As an alternative, the firms can signal their competitor a transfer price above the market price of the intermediate input through a proper choice of their accounting system. The paper identifies conditions under which the choice of absorption costing is a dominant strategy for both firms. Moreover, when the firms' products are close substitutes, the strategic benefits of full cost based transfer pricing can provide incentives to maintain a production department that would not be able to survive as a separate firm in the long run.

JEL Classification: D43, L13, L22, M40, M46

Suggested Citation

Goex, Robert F., Strategic Transfer Pricing, Absorption Costing and Vertical Integration (May 28, 1998). Available at SSRN: https://ssrn.com/abstract=98661 or http://dx.doi.org/10.2139/ssrn.98661

Robert F. Goex (Contact Author)

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

Hottingerstrasse 10
Plattenstrasse 14
Zurich, 8032
Switzerland

University of Zurich - Managerial Accounting ( email )

Seilergraben 53
Zurich, CH-8001
Switzerland

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

Plattenstrasse 14
Zürich, 8032
Switzerland

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