<abstract xmlns="http://www.w3.org/1999/xhtml"><p> 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.</p></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.

Negotiating transfer pricing using the Nash bargaining solution

International Journal of Applied Mathematics and Computer Science

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

{"article-title":"Negotiating transfer pricing using the Nash bargaining solution"}

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...

Negotiating transfer pricing using the Nash bargaining solution

Published Online: Jan 13, 2018

Page range: 853 - 864

DOI: https://doi.org/10.1515/amcs-2017-0060

Keywords
negotiated transfer pricing, Nash bargaining, tax avoidance, corporate taxation

© by Julio B. Clempner

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Negotiating transfer pricing using the Nash bargaining solution

Published Online: Jan 13, 2018

Page range: 853 - 864

DOI: https://doi.org/10.1515/amcs-2017-0060

Keywordsnegotiated transfer pricing, Nash bargaining, tax avoidance, corporate taxation

© by Julio B. Clempner

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Keywords
negotiated transfer pricing, Nash bargaining, tax avoidance, corporate taxation