On Suboptimization in Decomposition Approaches to Transfer Pricing

THIS PAPER SHOWS THAT EVEN IN THE ABSENCE OF MARGINAL-COST INFORMATION ABOUT THE SELLING DIVISION, THE BUYING DIVISION CAN, UNDER CERTAIN CONDITIONS, BENEFIT BY BEHAVING AS A MONOPSONISTIC BUYER. BUYING DIVISION CAN MAXIMIZE ITS DIVISIONAL PROFIT AT THE EXPENSE OF PROFIT FOR THE WHOLE FIRM. ANALOG I...

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Bibliographic Details
Published in:The Journal of industrial economics 1971-07, Vol.19 (3), p.220-230
Main Authors: Naert, Philippe A., Christian T. L. Janssen
Format: Article
Language:English
Subjects:
Average cost
Average revenue
Finished goods
Intermediate products
Marginal cost curve
Marginal costs
Marginal profit
Marginal revenue
Optimization
Revenue
Transfer pricing
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Summary:THIS PAPER SHOWS THAT EVEN IN THE ABSENCE OF MARGINAL-COST INFORMATION ABOUT THE SELLING DIVISION, THE BUYING DIVISION CAN, UNDER CERTAIN CONDITIONS, BENEFIT BY BEHAVING AS A MONOPSONISTIC BUYER. BUYING DIVISION CAN MAXIMIZE ITS DIVISIONAL PROFIT AT THE EXPENSE OF PROFIT FOR THE WHOLE FIRM. ANALOG IS TRUE FOR THE SELLING DIVISION. IT IS THEN NOT SUFFICIENT FOR THE PURPOSE OF AVOIDING SUBOPTIMIZATION SIMPLY TO PREVENT INTERDIVISIONAL EXCHANGE OF MARGINAL-COST INFORMATION. ARTICLE SHOWS A CASE OF INTERDIVISIONAL EXCHANGE OF MARGINAL-COST INFORMATION AND HOW THIS CAN LEAD TO SUBOPTIMIZATION. ALSO, THAT IT WILL OCCUR WHEN INFORMATION IS NOT EXCHANGED. DECOMPOSITION-APPROACH EVEN WHEN MARGINAL-COST INFORMATION IS NOT KNOWN WILL NOT ALWAYS YIELD A SOLUTION OPTIMAL FOR THE FIRM AS A WHOLE.
ISSN:0022-1821
1467-6451
DOI:10.2307/2097427