Strategic Transfer Pricing Author(s): Michael Alles and Srikant Datar Source: Management Science, Vol. 44, No. 4 (Apr., 1998), pp. 451-461 Published by: INFORMS Stable URL: http://www.jstor.org/stable/2634608 . Accessed: 15/08/2011 07:30
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Strategic

Transfer

Pricing

Michael Alles * Srikant Datar
CBA 4M-202, University of Texas at Austin, Austin, Texas 78712 HarvardBusiness School,Accounting and ControlArea, Soldier'sField, Boston,Massachusetts02163

M\ost research into cost systems has focused on their motivational implications. This paper , takes a different approach, by developing a model where two oligopolistic firms strategically select their cost-based transfer prices. Duopoly models frequently assume that firms game on their choice of prices. Product prices, however, are ultimately based on the firms' transfer prices that communicate manufacturing costs to marketing departments. It is for this reason that transfer prices will have a strategic component to them. We derive implications for cost system choice and transfer pricing, including showing that firms may cross subsidize their products-a result consistent with the empirical evidence. (TransferPricing; Full Cost Allocation;Incentives;Costing)

1. Introduction
Our objective