Transfer Pricing

1
Transfer Pricing

• What is a transfer price?
• Does transfer pricing re-introduce transactions
  costs?
• Because central management has direct control
  over the divisions it can impose the rules by
  which transfer prices are set. This can affect
  the efficiency of the internal market.

2
Transfer Pricing

• The problem of TP is how to attain several goals
  simultaneously, ideally it should
• lead to efficient trade between divisions
• facilitate performance evaluation for divisions
  and their managers
• form the basis for setting up incentives and
  reward structure for managers

3
The Marginalist Approach to Transfer Pricing

• There is a single period and there is no
  uncertainty in demand or costs.
• The goal of the M-form firm is overall profit
  maximisation. Divisions are profit centres each
  of their managers aims to maximise profits.
• There are no cost or demand interdependencies.
• Truth-telling is assumed.
• There are no taxes, or taxes have a neutral
  effect.

4
The Marginalist Approach to Transfer Pricing

• With no intermediate good external market.
• With an external market in the intermediate good.
• Competitive.
• Imperfectly Competitive.

5
Transfer Pricing

• Does the Marginalist Approach work?
• How are such schemes implemented?
• Incentives and Transfer Pricing.
• Multinational Transfer Pricing.
• Transfer Pricing in Practice.