National Differences in the Use of Internal Transfer Prices

For a parallel analysis with regard to national planning, see Devons Ely , Planning in Practice; Essays in Aircraft Planning in Wartime (Cambridge, England: Cambridge University Press, 1950). Devons argues that in British wartime planning for airplane production there were inevitably as many plans as planners.

For a broad treatment of this theme, see Granick D. , Managerial Comparisons of Four Developed Countries: France, Britain, United States, and Russia (Cambridge, Mass.: MIT Press, 1972).

For a study showing this with regard to the United States see Solomons D. , Divisional Performance: Measurement and Control (New York: Financial Executives Research Foundation, 1965), pp. 183–84. Such transfer pricing may be modified to take account of cost savings (in transport, packaging, and paperwork) realized by either the purchasing or supplying unit.

See Hirschleifer J. , “On the Economics of Transfer Pricing,” Journal of Business (July 1956), pp. 172–84; and “Economics of the Divisionalized Firm,” Journal of Business (April 1957), pp. 96–108. Hirschleifer points out various caveats, but these probably are not very important for most firms.

See Johnston J. , Statistical Cost Analysis (New York: McGraw-Hill, 1960).

See Dean Joel , “Decentralization and Intracompany Pricing,” Harvard Business Review (July-August 1955), pp. 65–74; and Cook Paul W. Jr. , “Decentralization and the Transfer-Price Problem,” Journal of Business (April 1955), pp. 87–94.

Holton Richard , Dean, School of Business Administration, University of California, Berkeley, personal communication.

See Granick , op. cit., Chapter 12, for a fuller treatment of the case studies.

Ibid., pp. 71–75 and 89–93 (a fuller discussion of the representativeness of the samples and justification of the method of testing hypotheses through the use of representative case studies).

See Dean , op. cit., for an espousal of such arm's-length bargaining. Heflebower, in a reference to the American economy, claims that it is rare to find a situation in which there exists both an active external market and reliable reporting of prices for products transferred between industrial divisions, except for some early-stage processing of agricultural commodities ( Heflebower R. B. , “Observations on Decentralization in Large Enterprises,” Journal of Industrial Economics (November 1960), p. 14.

Unfortunately, little information is available in print that would allow us to generalize as to American practice. A survey source is the National Industrial Conference Board, Interdivisional Transfer Pricing (Studies in Business Policy, No. 122, 1967); but the absence of interviewing in the study makes the data difficult to interpret. A number of Harvard Business School cases are presented in Anthony R. N. Dearden J. Vancil R. F. , Management Control Systems (Homewood, Illinois: Irwin, 1965), pp. 276–313; however, the authors make no claims that these are representative.

See Granick , op. cit., Chapters 7 to 10.