Capacity rights and full cost transfer pricing

Dutta, Sunil ; Reichelstein, Stefan

Document Type: Article
Year of publication Online: 2020
The title of a journal, publication series: Management Science
Volume: tba
Page range: tba
Place of publication: Hanover, MD
Publishing house: INFORMS
ISSN: 0025-1909 , 1526-5501
Edition: August 2019
Publication language: English
Institution: Business School > Stiftungsprofessur für ABWL (Reichelstein 2018-)
License: CC BY 4.0
Subject: 330 Economics
Abstract: This paper examines the theoretical properties of full cost transfer prices in multi-divisional firms. In our model, divisional managers are responsible for the initialacquisition of productive capacity and the utilization of that capacity in subsequentperiods, once operational uncertainty has been resolved. We examine alternativevariants of full cost transfer pricing with the property that the discounted sum oftransfer payments is equal to the initial capacity acquisition cost and the presentvalue of all subsequent variable costs of output supplied to a division. Our analysisidentifies environments where particular variants of full cost transfer pricing induceefficiency in both the initial investments and the subsequent output levels. Ourfindings highlight the need for a proper integration of intracompany pricing rules anddivisional control rights over capacity assets.

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