A multiple price approach to limiting intra-group transfer pricing negotiations

Various approaches to solving the well-known transfer pricing problem are known. However, none satisfactorily resolve the objective of allowing both divisions to earn a profit in such a way that sub-optimal output levels are avoided. Tomkins (1990) combines a single cost-plus transfer price with a pragmatic process of negotiation. That model is excellent when the source division’s target contribution is ‘small’. However, its practical value is limited if the target contribution is ‘close’ to 50%, because a disproportionate level of negotiation is required. In certain circumstances a high level of negotiation may be costly, contrary to the organisational culture, or strategic imperatives. In this paper, Tomkins’ model is developed by introducing multiple transfer prices. By using just a few transfer prices, it is possible to guarantee that the proportion of group contribution over which negotiation is required does not exceed 1%, thereby reducing the risk of managers taking advantage of unequal power