Strategic Transfer Pricing for Products/Services under Oligopoly

This paper analyzes the use of transfer pricing as a strategic device in divisional firms facing duopolistic price competition. We suppose that the firms confront the oligopoly intermediate products/services market and final products/service market. By comparing two transfer pricing policy: uniform transfer pricing and discriminating transfer pricing, we conclude that if the price of intermediate product in internal and external market is equal, then the transfer price should be marginal cost plus; if the headquarters set discriminating price in internal and external intermediate markets, the transfer price will rise. Meanwhile, the profit of the total firms and the downstream divisions will also increase