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Pricing Internal Trade to Get a Leg up on External Rivals
Author(s) -
Arya Anil,
Mittendorf Brian
Publication year - 2008
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2008.00192.x
Subject(s) - upstream (networking) , imperfect competition , competition (biology) , marginal cost , microeconomics , industrial organization , imperfect , economics , transfer pricing , business , perfect competition , computer science , finance , computer network , ecology , linguistics , philosophy , multinational corporation , biology
The pricing of transfers from parent to subsidiary is an oft‐explored issue. Linking the cost of internal transfers with external market prices is one common approach, typically justified when the market for the good is perfectly competitive. This paper shows that imperfect competition may also justify market‐based transfer prices. Concern that transfer price will deviate from marginal cost and thereby distort subsidiary choices can lead a parent to undertake actions to influence the market price of the upstream good. Such efforts can provide a desirable strategic posture in the upstream market.