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Pricing Internal Trade to Get a Leg up on External Rivals

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Abstract:

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.

Document Type: Research Article

DOI: https://doi.org/10.1111/j.1530-9134.2008.00192.x

Affiliations: 1: The Ohio State University Fisher College of Business 2100 Neil Avenue Columbus, OH 43210, Email: arya@cob.osu.edu 2: Yale School of Management 135 Prospect Street New Haven, CT 06511, Email: brian.mittendorf@yale.edu

Publication date: 2008-09-01

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