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.
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
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.
The Marginalist Approach to
Transfer Pricing
 With no intermediate good external
market.
 With an external market in the
intermediate good.
– Competitive.
– Imperfectly Competitive.
Transfer Pricing
 Does the Marginalist Approach work?
 How are such schemes implemented?
 Incentives and Transfer Pricing.
 Multinational Transfer Pricing.
 Transfer Pricing in Practice.