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Decentralization and Transfer Pricing Under Oligopoly
Author(s) -
Zhao Laixun
Publication year - 2000
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.2000.tb00344.x
Subject(s) - transfer pricing , multinational corporation , decentralization , subsidiary , oligopoly , competition (biology) , microeconomics , transfer (computing) , economics , simple (philosophy) , value (mathematics) , industrial organization , business , market economy , computer science , finance , cournot competition , parallel computing , ecology , philosophy , epistemology , machine learning , biology
This paper presents a simple model of a partially decentralized multinational firm (MNF) in competition with a rival firm. It is shown that transfer pricing can be used as a rent‐shifting device by the MNF to compete with the rival. This arises because the MNF headquarters uses the transfer price to manage different subsidiaries. The specific value of the transfer price chosen by the MNF depends on whether the rival firm produces the intermediate good, the final good, or both and whether the rival is integrated or not. In particular, both decentralization and competition with a fully integrated rival result in lower transfer prices.