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The Arm's Length Principle and Tacit Collusion

By Chongwoo Choe and Noriaki Matsushima

Abstract

The arm's length principle states that the transfer price between two associated enterprises should be the price that would be paid for similar goods in similar circumstances by unrelated parties dealing at arm's length with each other. This paper examines the effect of the arm's length principle on dynamic competition in imperfectly competitive markets. It is shown that the arm's length principle renders tacit collusion more stable. This is true whether firms have exclusive dealings with unrelated parties or compete for the demand from unrelated parties.

Topics: M41 - Accounting, L13 - Oligopoly and Other Imperfect Markets, L41 - Monopolization; Horizontal Anticompetitive Practices, D43 - Oligopoly and Other Forms of Market Imperfection
Year: 2011
DOI identifier: 10.2139/ssrn.1986387
OAI identifier: oai:mpra.ub.uni-muenchen.de:37295

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