The Multinational Firm, Transfer Pricing and the Nature of Competition

A multinational firm sets the price that applies to intra-firm trade between the firm´s affiliates at a central level, but delegates decisions about national prices (or quantities) to national affiliates. When these affiliates encounter competition, it is shown that delegation of authority and the nature of competition, changes the role of the transfer price: it is now both a tax saving and a strategic device. Comparative static results develop transfer pricing policies for affiliates encountering Cournot as well as Bertrand competition not previously found in the literature.