Transfer Pricing Summary

Key points Parties should be acting on information regarding marginal costs and marginal benefits to the company. External markets for the intermediate good, either as suppliers or buyers can be advantageous.

…Continued Parties will have incentives to distort prices away from marginal costs and marginal benefits, either to act as internal monopolists or as internal monopsonists. Parties will have incentives to suppress outside transactions where possible.

And finally, Transfer prices and related policies will not necessarily be worked out optimally by the transacting parties. A higher level of management, with a few toward the overall interests of the firm will be require to set, or at least review, transfer prices.