A game-theoretic approach to transfer pricing in a vertically integrated supply chain

We study the problem of setting transfer prices in a vertically integrated supply chain, in which the divisions share technology and transactions costs. We develop a cooperative game that provides transfer prices for the intermediate products in the supply chain. This model is applied both when the...

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Bibliographic Details
Published in:International journal of production economics 2008-10, Vol.115 (2), p.542-552
Main Author: Rosenthal, Edward C.
Format: Article
Language:English
Subjects:
Cooperative game theory
Game theory
Linear programming
Prices
Studies
Supply chain management
Supply chains
Transfer prices
Transfer prices Supply chain management Cooperative game theory
Transfer pricing
Vertical integration
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Summary:We study the problem of setting transfer prices in a vertically integrated supply chain, in which the divisions share technology and transactions costs. We develop a cooperative game that provides transfer prices for the intermediate products in the supply chain. This model is applied both when the market prices for these products are known and also when their valuations differ. We provide a solution that is fair and acceptable to all divisions. In the perfect information case, the Shapley value generates the transfer prices, while in the asymmetric case we obtain transfer prices from the solution to a linear program.
ISSN:0925-5273
1873-7579
DOI:10.1016/j.ijpe.2008.05.018