The Transfer Pricing Problem:A Mixed Mechanism Approach

Abstract.

We consider a decentralized firm with one selling division and one buying division, with asymmetric information about the cost functions of the two divisions. We show that there is a mechanism which achieves efficiency, truth-telling via dominant strategies, individual rationality, and achieves almost budget balancing for a large class of cost structures.

Keywords: Transfer Pricing, Mechanism Design, Decentralization, Capacity.

Classification: C69, C79, D81, D82, L22, M11.