Internal Pricing

Internal Pricing surveys the transfer pricing literature with a focus on commonly-used pricing schemes using incomplete contracting models. Chapter 2 develops the basic symmetric information model to compare the performance of cost-based and negotiated pricing in the absence of external input markets. Chapter 3 considers market-based pricing and the role of internal price adjustments; it ignores investments and focuses solely on trading incentives. Chapter 4 adds investments to the model of Chapter 3 and shows that investment opportunities further strengthen the case for internal adjustments. Chapter 5 reconsiders the initial analysis of Chapter 2 for the case of asymmetrically informed divisional managers. The book ends with the author's conclusions and an appendix including the mathematical proofs.

A key theme running through Internal Pricing is that the firm's central office (i.e., headquarters) plays a rather limited role in mediating individual transactions. This captures the stylized empirical fact that in most firms, headquarters designs the broad "rules of the game" by choosing a pricing mechanism and compensation contracts, but usually does not get involved in pricing on a product-by-product basis.

1 Introduction. 2 Intrafirm Trade Absent External Markets. 3 Tying Internal Prices to Market Prices. 4 Bringing Investments and External Markets Together. 5 Internal Pricing with Imperfect Information. 6 Conclusion. References.