Cost-based transfer pricing with the existence of a direct channel in an integrated supply chain

Purpose This study aims to analytically explore the economic role of transfer pricing in a vertically integrated supply chain with a direct channel, specifically when it uses cost-based transfer prices, as is frequently observed in management practices. We compare two representative transfer pricing methods: full-cost and variable-cost pricing. Although many firms open a direct channel, which affects the optimal decision on transfer prices, prior literature has not considered this case. Design/methodology/approach We demonstrate the results using a non-cooperative game theoretical approach. Findings The results show that full-cost pricing is more profitable than variable-cost pricing when the fixed cost allocation to the marketing division is low, contrary to the established position in prior studies, from which I select their benchmark case. Moreover, we obtain a counterintuitive result, whereby, the firm-wide profit of a vertically integrated supply chain increases with fixed cost allocation. Originality/value This study considers the direct channel and internal transfer pricing in a vertically integrated supply chain, while prior research only considers one or the other. This model suggests an optimal choice of cost-based transfer pricing in managerial decisions. In addition, the authors demonstrate the positive effect of increasing fixed cost allocation, which prior management studies do not show. The findings of this study have implications for managerial practice by providing insights into supply chain design and showing that firms should consider the competition between channels when making decisions about transfer pricing methods.

Second order cone programming formulation of the fixed cost allocation in DEA based on Nash bargaining game

<p style='text-indent:20px;'>A vital issue in many organizations is the fair allocation of fixed cost among its subsets. In this paper, using data envelopment analysis, first we study fixed cost allocation based on both additive and multiplicative efficiency decompositions in the cooperative context for a two-stage structure in the presence of exogenous inputs and outputs. A conic relaxation formulation of multiplicative decomposition is given. Then, fixed cost allocation based on the leader-follower paradigm are presented. In the sequel, for allocating a fair fixed cost between the stages, using the results of the leader-follower model, we present the nonlinear Nash bargaining game model that independent of the efficiency score of each unit, allocates fixed cost to the stages. The nonlinear model is reformulated as a second order cone program which is an imporvement over the parametric linear models in the literature. Finally, two examples are used to illustrate the proposed models and compare their results with the existing models.</p>