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then ﬁrms will often set up an internal system that, in some ways, mimics a
market mechanism. The ﬁrm will put in a place a transfer price to mediate
the divisions’ exchange. The downstream division pays the upstream division
a ﬁxed price for each unit of the intermediate good that it purchases. • What is transfer pricing? M&S 452 — Strat and Org
c 2008 Scott Schaefer • Will the Beer division’s price be too high or too low? Upstream
' Transfer price payments Intermediate good
Division Final good
E 28 – Illustration:
∗ Suppose upstream incurs a ﬁxed cost of production of $100,000 and marginal
costs of $5 per unit.
∗ Suppose downstream purchases 50,000 units of the intermediate good. – The one that people within ﬁrms tend to focus on is the redistributive eﬀect
of transfer prices. That is, transfer prices allocate proﬁt among divisions — if
the divisions are proﬁt centers, then people in those divisions will care about
what the transfer price is. • What are the eﬀects of transfer prices? M&S 452 — Strat and Org
c 2008 Scott Schaefer • Picture: What to Take Away 30 – Put decision making authority with people who have, or can get, the necessary
– Structure aﬀects the set of feasible performance measurement and reward
– External Costs and Beneﬁts
– Transfer pricing facilitates decentralization • Big Picture M&S 452 — Strat and Org
c 2008 Scott Schaefer • But splitting proﬁts among divisions is not the reason that transfer pricing is
relevant for strategy. · Upstream’s proﬁts are · Downstream pays ∗ If the transfer price is set at $8 per unit, then · Upstream’s proﬁts are · Downstream pays ∗ If the transfer price is set at $12 per unit, then – General Motors and the multidivisional form.
– Pricing externalities: Camaros and Firebirds.
– Selling memory chips. • Speciﬁc Applications...
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This document was uploaded on 02/20/2014.
- Spring '14