I would like to hear from anyone with experience using dual pricing transfer pricing (non-zero-sum) as a solution for intercompany transfers. More specifically I would like to better understand the value derived from this method and any negative issues that your organization experienced from using this method. I know this method is not widely used do to the underlying complexities. Does this method have merit in a decentralized organization to ensure efficient internal trade, goal congruence among internal businesses, and proper alignment of income based incentives for
Dual Pricing Transfer Pricing
Answers
Hi Larry,
One (or at least I) cannot know the practices of every multinational company and whether there is someone out there that uses dual transfer prices but I would surmise that you only found this in an academic article. In fact, while there is a huge academic literature with mathematical solutions to finding the "optimal" transfer price, the simple solution practiced by sophisticated multinationals is to eliminate the decentrailzation issue by developing management performance metrics and rewards based on consolidated system profit rather than some divisional or entity-centric metric. Typically, either sales or manufacturing (depending on organzational culture) will "earn" the consolidated profit while the other division is considered a service organization to the primary division and is measured on service metrics. Alternatively, you could measure both divisions on consolidated profit. The point being that all divisions should have the incentive to maximize consolidated profit rather than divisional. The consolidated approach also has the huge advantage of eliminating divisional fights about transfer prices because they will no longer affect rewards and leaves its determination to the
If my explanation is not clear, please give me a call.
Best wishes for the holidays.
Jake
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