External and internal pricing in multidivisional firms

Multidivisional firms frequently rely on external market prices in order to value internal transactions across profit centers. This paper examines market-based transfer pricing when an upstream division has monopoly power in selling a proprietary component both to a downstream division within the same firm and to external customers. When internal transfers are valued at the prevailing market price, the resulting transactions are distorted by double marginalization. The imposition of intracompany discounts will always improve overall firm profits provided the supplying division is capacity constrained. Under certain conditions it is then possible to design discount rules so that the resulting prices and sales quantities are effcient from the corporate perspective. In contrast, the impact of intracompany discounts remains ambiguous when the capacity of the selling division is essentially unlimited. It is then generally impossible to achieve fully effcient outcomes by means of market-based transfer pricing unless the external market for the component is suffciently large relative to the internal market. Downloa

External and internal pricing in multidivisional firms

Multidivisional firms frequently rely on external market prices in order to value internal transactions across profit centers. This paper examines market-based transfer pricing when an upstream division has monopoly power in selling a proprietary component both to a downstream division within the same firm and to external customers. When internal transfers are valued at the prevailing market price, the resulting transactions are distorted by double marginalization. The imposition of intracompany discounts will always improve overall firm profits provided the supplying division is capacity constrained. Under certain conditions it is then possible to design discount rules so that the resulting prices and sales quantities are effcient from the corporate perspective. In contrast, the impact of intracompany discounts remains ambiguous when the capacity of the selling division is essentially unlimited. It is then generally impossible to achieve fully effcient outcomes by means of market-based transfer pricing unless the external market for the component is suffciently large relative to the internal market. Downloa

Sub-Micron Devices Inc

In March 1996, the ASIC Division of Sub-Micron Devices received an inquiry from Western Digital: would ASIC be willing to supply 3,000,000 chips annually for a period of three years at a price of $40/chip? ASIC’s Controller, Gary Ravenport convened a meeting with Peter Parks, his assistant, to review the profitability of the Western Digital proposal

External and internal pricing in multidivisional firms

Multidivisional firms frequently rely on external market prices in order to value in-ternal transactions across profit centers. This paper examines market-based transfer pricing when an upstream division has monopoly power in selling a proprietary com-ponent both to a downstream division within the same firm and to external customers. When internal transfers are valued at the prevailing market price, the resulting trans-actions are distorted by double marginalization. The imposition of intracompany discounts will always improve overall firm profits provided the supplying division is capacity constrained. Under certain conditions it is then possible to design discount rules so that the resulting prices and sales quantities are efficient from the corporate perspective. In contrast, the impact of intracompany discounts remains ambiguous when the capacity of the selling division is essentially unlimited. It is then generally impossible to achieve fully efficient outcomes by means of market-based transfer pric-ing unless the external market for the component is sufficiently large relative to the internal market.

Sub-Micron Devices Inc

In March 1996, the ASIC Division of Sub-Micron Devices received an inquiry from Western Digital: would ASIC be willing to supply 3,000,000 chips annually for a period of three years at a price of $40/chip? ASIC’s Controller, Gary Ravenport convened a meeting with Peter Parks, his assistant, to review the profitability of the Western Digital proposal