infonet-economy

The purpose of this paper is to deal with two features of the multinational behaviour not found in previous models of transfer pricing. First on the contrary to earlier literature, we assume that quantity (or price) decisions are no more centralised but are delegated to exporting and importing affiliates. Second, we underline the importance of strategic interactions with other firms in local markets to calculate the optimal transfer price. We find that the existence of Cournot (or Bertrand) competition on local markets implies that the transfer price should deviate from the marginal cost of the exporting affiliate because of three effects: (1) a profit shifting effect; (2) a stratégic effect on the foreign market; (3) a cost effect on the national market. The optimal transfer price generally depends on both the nature of the competition and the relative magnitude of the later effects. Finally the paper deals with both cost asymetries effects on the transfert price charged by the multinational and conditions under which the multinational will forclose the rival firm when it supply to the rival an input that is monopolised