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| Author: | Göx, R.F. Schöndube, J.R. |
| Title: | Strategic transfer pricing with risk averse agents |
| Journal: | Schmalenbach Business Review
2004 : APR, VOL. 56:2, p. 98-118 |
| Index terms: | Transfer pricing Agency theory Duopoly |
| Language: | eng |
| Abstract: | This paper analyses strategic transfer pricing with risk- and effort-averse divisional managers. In contrast to earlier literature, it is found that the existence of a standard agency problem allows transfer pricing to serve as commitment device even if the transfer prices are not mutually observable. The reason is that transfer prices are set above marginal cost to solve the agency problem and not for strategic purposes. Therefore, delegating the pricing authority to a risk-averse manager implies that he sets a higher product price than does the risk-neutral owner, because at the divisional level the transfer price represents the relevant unit cost for pricing. It is shown that the optimal scope of managerial authority generally depends on both the risk premium and the intensity of competition in the product market. Conditions under which the delegation of pricing responsibilities to risk-averse managers constitutes a dominant strategy equilibrium are also identified. |
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