Strategic Transfer Pricing, Absorption Costing, and Observability

Posted: 27 Jun 2000

See all articles by Robert F. Göx

Robert F. Göx

University of Zurich - Managerial Accounting; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Abstract

This paper analyzes the use of transfer pricing as a strategic device in divisionalized firms facing duopolistic price competition. When transfer prices are observable, both firms headquarters will charge a transfer price above the marginal cost of the intermediate product to induce their marketing managers to behave as softer competitors on the final product market. When transfer prices are not observable, strategic transfer pricing is not an equilibrium and the optimal transfer price equals the marginal cost of the intermediate product. As a strategic alternative, however, the firms can signal the use of transfer prices above marginal cost to their competitors by publicly observable commitment to an absorption costing system. The paper identifies conditions under which the choice of absorption costing is a dominant strategy equilibrium.

Key Words: transfer pricing; Absorption costing; Product pricing

JEL Classification: D49, L13, L22, M40, M46

Suggested Citation

Goex, Robert F., Strategic Transfer Pricing, Absorption Costing, and Observability. Available at SSRN: https://ssrn.com/abstract=234265

Robert F. Goex (Contact Author)

University of Zurich - Managerial Accounting ( email )

Plattenstrasse 14
Zurich, CH-8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

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