Negotiating Transfer Prices

Haake, Claus-Jochen; Martini, Jan Thomas

doi:10.1007/s10726-012-9286-6

Cited by 9 publications

(5 citation statements)

References 25 publications

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“…The paper takes seriously as a real‐life possibility that the core of the network formation stage may not exist. Haake and Martini () use CGT to model negotiations between two divisions over a transfer pricing regime and then use NGT to model these divisions' investment and production decisions. The authors consider the ramifications of different CGT solution concepts, and do not allow for transferrable utility because transfer pricing not only affects value capture but also the incentive of each division to create value.…”

Section: Modeling Choicesmentioning

confidence: 99%

Using cooperative game theory to contribute to strategy research

Ross

2018

Strategic Management Journal

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Research Summary: A growing literature uses cooperative game theory to develop formal strategy theories of value creation and value capture. In a recent review, Gans and Ryall (2017) provide an introduction to this literature in which they emphasize the biform modeling framework of Stuart (1996, 2007). The purpose of this article is to extend the work of Gans and Ryall (2017) by (a) discussing the many ways that cooperative game theory and allied models can contribute to strategy research beyond the biform framework itself, and (b) offering recommendations for choosing among formal modeling options, both cooperative and noncooperative. Managerial Summary: Growing numbers of strategy scholars are using cooperative game theory to study strategic interaction and develop practical tools for managers, because it offers the mathematical precision of traditional formal modeling techniques while imposing fewer constraints on the actions of firms and managers. Gans and Ryall (2017) review cooperative game theory, with a particular focus on a version developed by Stuart (1996, 2007). This article extends Gans and Ryall (2017) by discussing the many additional ways that cooperative game theory can contribute to strategy research and how to choose between cooperative game theory and other formal modeling methods.

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Section: Modeling Choicesmentioning

confidence: 99%

Using cooperative game theory to contribute to strategy research

Ross

2018

Strategic Management Journal

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“…Vaysman (1998) developed a bargaining model of negotiated transfer pricing incorporating private divisional information where the firm designs a compensation system employing divisional performance evaluation and negotiated transfer pricing. Haake and Martini (2013) analyzed two transfer-pricing schemes and their corresponding bargaining problems (Nash, 1950;Kalai and Smorodinsky, 1975) restricted to two divisions. In general, cooperative and noncooperative game theory solutions focusing on negotiations have been presented in the literature (Baldenius et al, 1999;Chwolka et al, 2010;Johnson, 2006;Wielenberg, 2000).…”

Section: 1mentioning

confidence: 99%

Negotiating transfer pricing using the Nash bargaining solution

Clempner

Poznyak²

2017

International Journal of Applied Mathematics and Computer Science

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This paper analyzes and proposes a solution to the transfer pricing problem from the point of view of the Nash bargaining game theory approach. We consider a firm consisting of several divisions with sequential transfers, in which central management provides a transfer price decision that enables maximization of operating profits. Price transferring between divisions is negotiable throughout the bargaining approach. Initially, we consider a disagreement point (status quo) between the divisions of the firm, which plays the role of a deterrent. We propose a framework and a method based on the Nash equilibrium approach for computing the disagreement point. Then, we introduce a bargaining solution, which is a single-valued function that selects an outcome from the feasible pay-offs for each bargaining problem that is a result of cooperation of the divisions of the firm involved in the transfer pricing problem. The agreement reached by the divisions in the game is the most preferred alternative within the set of feasible outcomes, which produces a profit-maximizing allocation of the transfer price between divisions. For computing the bargaining solution, we propose an optimization method. An example illustrating the usefulness of the method is presented.

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“…The divisions are organized as profit centers, and central management pursues the interests of the firm"s majority shareholders. 7 The firm"s decentralized organization can readily be motivated by "s restricted computational capacity, asymmetric information between the divisions and with respect to the conditions of the transaction, and reasons of motivating divisional managements. 5 See OECD (2010, § 1.5).…”

Section: The Modelmentioning

confidence: 99%

“…6 Considering a different status-quo point, probably set by , does not change this problem and ultimately comes to administered transfer pricing. 7 Such an organizational structure is not uncommon in business practice. Examples are given by the Schüco International KG in Bielefeld (Germany) or the divisions of the Whirlpool Corporation (U.S.) as described by Tang (2002, pp.…”

Section: The Modelmentioning

confidence: 99%

See 1 more Smart Citation

Transfer Pricing for Coordination and Profit Allocation

Martini¹

2012

AJBMR

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This paper examines coordination and profit allocation in a profit-center organization using a single transfer price. The model includes compensations, taxes, and minority interests of two divisions deciding on capacity and sales. The analysis covers arm’s length transfer prices which are either administered by central management or negotiated by the divisions. Administered transfer prices refer to past transactions and therefore maximize firm-wide profit net of divisional compensations, taxes, and minority profit shares only for given decentralized decisions. From an ex-ante perspective, it is shown that adverse effects on coordination may result in inefficient divisional profits of which all stakeholders suffer. We motivate a positive effect of advance pricing agreements, intra-firm guidelines, and restrictive treatments of changes in the firm’s accounting policy. By contrast, negotiations ignore compensations, taxes, and minority shares but yield efficient divisional profits. Negotiations seem compelling as they perfectly reflect the arm’s length principle. Moreover, common practices such as arbitration or one-step pricing schemes allow the firm to engage in manipulation at the expense of other stakeholders.

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Negotiating Transfer Prices

Cited by 9 publications

References 25 publications

Using cooperative game theory to contribute to strategy research

Using cooperative game theory to contribute to strategy research

Negotiating transfer pricing using the Nash bargaining solution

Transfer Pricing for Coordination and Profit Allocation

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