Journal
INTERNATIONAL JOURNAL OF PRODUCTION ECONOMICS
Volume 139, Issue 1, Pages 69-79Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.ijpe.2011.10.030
Keywords
Transfer pricing; R&D risk aversion; Allocation of fixed production costs
Categories
Funding
- Ministry of Education, Culture, Sports, Science and Technology of Japan (MEXT) [22730196]
- Grants-in-Aid for Scientific Research [22730196] Funding Source: KAKEN
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This paper examines the economic role of transfer pricing for a vertically integrated supply chain when a risk-averse production-division manager faces uncertainty on the outcomes from R&D investment. In particular, we compare two representative cost-based transfer pricing methods: full-cost and variable-cost pricing. We construct an economic model based on the assumption that R&D investment reduces the expected fixed costs of a production factor as well as the variable production costs. We show that a firm's profit under full-cost transfer pricing is greater than that under variable-cost transfer pricing under certainty. Contrary to this benchmark result, variable-cost pricing becomes more profitable than full-cost pricing when the risk-averse manager bears relatively high risk. (C) 2011 Elsevier B.V. All rights reserved.
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