Brand proliferation and inter‐brand competition: The strategic role of transfer pricing

Abstract

Purpose

This paper first attempts to analyze the issue of brand proliferation by a monopolist allowing transfer pricing as a channel to bridge headquarters and brand divisions, and then to view how the headquarters uses transfer pricing as a strategic device to encounter intra‐brand competition, inter‐brand competition and cross‐border profit‐shifting under an oligopolistic market.

Design/methodology/approach

This paper models cross‐country interactions in a Cournot‐Nash framework, and characterizes equilibrium that involves both transfer pricing and output decision. MNE's behavior is based on a two‐stage process in which the centralized headquarters' prior action on setting transfer pricing is to backup the decentralized subsidiaries in their output decision‐making.

Findings

It is demonstrated that MNEs have the incentive to manipulate their transfer prices in order to shift profit cross‐border. Higher transfer pricing enables brand divisions to collude easier in the intra‐brand competition model, and the level of transfer price hinges upon the strength of intra‐brand competition and inter‐brand competition. In addition, transfer pricing is affected by tax differences between two countries.

Originality/value

This paper provides the theoretical underpinning to see how headquarters may use transfer pricing as a strategic device to face intra‐ and inter‐brand competition that is visibly evident in many diverse industries.

Citation

Fong‐Sheng Wang, L. and Wang, Y. (2008), "Brand proliferation and inter‐brand competition: The strategic role of transfer pricing", Journal of Economic Studies, Vol. 35 No. 3, pp. 278-292. https://doi.org/10.1108/01443580810887823