Management Accounting and Product Variety

Transfer pricing in a multidivisional firm: A cooperative game analysis

“…We assume that the upstream division's unit production cost is not a constant but a decreasing, convex function of the production quantity-i.e., the downstream division's order quantity, or the demand faced by the downstream division. Such a modeling approach renders our model and analysis more realistic, because it is consistent with the wide existence of "economies of scale,"see, e.g., Lingnau [12]. The quantity-dependent cost function also distinguishes our paper from other transfer pricing papers.…”

“…this division's unit production cost is dependent on the production quantity, because of the existence of economies of scale, for details, see, e.g., Lingnau [12]. Hence, the unit production cost-which is incurred by division U when this division makes Q(q) units of intermediate products-can be written as c(Q(q)).…”

“…We assume that c( ) is a decreasing, convex function of the production quantity; that is, c 0 ( ) 0 and c 00 ( ) 0. Moreover, similar to Lingnau [12], we assume that 1 + b j c 0 ( ) 0, for j = 1; : : : ; n. This means that the system-wide unit pro…t-i.e., the sum of the upstream division's and n downstream divisions'unit pro…ts-is increasing in each downstream division's retail price. For details, see online Appendix B.…”