online read us now
Paper details
Number 4 - December 2017
Volume 27 - 2017
Negotiating transfer pricing using the Nash bargaining solution
Julio B. Clempner, Alexander S. Poznyak
Abstract
This paper analyzes and proposes a solution to the transfer pricing problem from the point of view of the Nash bargaining
game theory approach. We consider a firm consisting of several divisions with sequential transfers, in which central
management provides a transfer price decision that enables maximization of operating profits. Price transferring between
divisions is negotiable throughout the bargaining approach. Initially, we consider a disagreement point (status quo) between
the divisions of the firm, which plays the role of a deterrent. We propose a framework and a method based on the Nash equilibrium approach for computing the disagreement point. Then, we introduce a bargaining solution, which is a single-valued function that selects an outcome from the feasible pay-offs for each bargaining problem that is a result of cooperation of the divisions of the firm involved in the transfer pricing problem. The agreement reached by the divisions in the game is
the most preferred alternative within the set of feasible outcomes, which produces a profit-maximizing allocation of the
transfer price between divisions. For computing the bargaining solution, we propose an optimization method. An example
illustrating the usefulness of the method is presented.
Keywords
negotiated transfer pricing, Nash bargaining, tax avoidance, corporate taxation