Transfer pricing in complex organizations: a review and integration of recent empirical and analytical research

  • Severin V. Grabski


Transfer pricing literature can be categorized according to the type of model employed and whether it is analytical or empirical. The major models are economic [based on Hirshleifer, 1956]; mathematical programming [Dopuch and Drake, 1964]; and behavioural [Watson and Baumler, 1975]. The objective of this paper is to review the recent literature (1974–1983) on transfer pricing and to try to discern future directions and possibilities for research. In particular, research relating to the major theoretical models (economic, mathematical programming, and behavioural) and other more ad hoc approaches is integrated with the empirical research on transfer pricing practices. In addition, the behavioural and organizational implications of transfer pricing are addressed with respect to the issues of organizational optimization, and integration and differentiation.


Central Management Management Account Transfer Price Profit Center Professional Bureaucracy 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Abdel-khalik, A.R. and E.J. Lusk, ‘Transfer Pricing — A Synthesis,’ The Accounting Review (January 1974), pp. 8-23.Google Scholar
  2. —, ‘Transfer Pricing — A Synthesis: A Reply,’ The Accounting Review (April 1975), pp. 355-58.Google Scholar
  3. Ackelsberg, R. and G. Yukl, ‘Negotiated Transfer Pricing and Conflict Resolution in Organizations,’ Decision Sciences (July 1979), pp. 387-98.Google Scholar
  4. Adams, J.S., ‘Inequity in Social Exchange,’ in L. Berkowitz (Ed.), Advances in Experimental Social Psychology, Vol. 2 (New York: Academic Press, 1965).Google Scholar
  5. Baily, A.D. and W.J. Boe, ‘Goal and Resource Transfers in the Multigoal Organization,’ The Accounting Review (July 1976), pp. 559-73.Google Scholar
  6. Baumol, W.J. and T. Fabian, ‘Decomposition, Pricing For Decentralization and External Economies,’ Management Science (September, 1964), pp. 1-13.Google Scholar
  7. Benke, R.L. and A.B. Caster, ‘Information Systems and Fixed Costs in Multi-divisional Companies,’ Cost and Management (March–April 1983), pp. 21-25.Google Scholar
  8. —, ‘An Application of the General Rule for Transfer Pricing: The Birch Paper Company Case,’ The Accountant’s Magazine (August 1981), pp. 259-62.Google Scholar
  9. Benke, R.L. and J.D. Edwards,’ should You Use Transfer Pricing to Create Pseudo-Profit Centers?,’ Management Accounting (NAA) (February 1981), pp. 36-39, 43.Google Scholar
  10. —, Transfer Pricing: Techniques and Uses (New York: National Association of Accountants, 1980.Google Scholar
  11. —, ‘Transfer Pricing: Techniques and Uses,’ Management Accounting (NAA) (June 1980), pp. 44-46.Google Scholar
  12. Benke, R.L., J.D. Edwards, and A.R. Wheelock, ‘Applying and Opportunity Cost General Rule for Transfer Pricing,’ Management Accounting (NAA) (June 1982), pp. 43-51.Google Scholar
  13. Blois, K.J. ‘Pricing of Supplies by Large Customers,’ Journal of Business Finance & Accounting (Autumn 1978), pp. 367-79.Google Scholar
  14. Buckhout, W.E., ‘Transfer Pricing Identifies Source of Profits and Loss,’ Chemical Marketing Reporter (March 8, 1976), pp. 16, 18, 23, 24.Google Scholar
  15. Burton, R.M., W.W. Damon, and D.W. Loughridge., ‘Economics of Decomposition: Resource Allocation vs. Transfer Pricing,’ Decision Sciences (July 1974), pp. 297-310.Google Scholar
  16. Burton, R.M. and B. Obel, ‘Efficiency of the Price, Budget, and Mixed Approaches Under Varying A Priori Information Levels for Decentralized Planning,’ Management Science (April 1980), pp. 401-17.Google Scholar
  17. Carleton, W.T., G. Kendall, and S. Tandon, ‘Application of the Decomposition Principle to the Capital Budgeting Problem in a Decentralized Firm,’ Journal of Finance (June 1974), pp. 815-27.Google Scholar
  18. Choudhury, N., ‘Transfer Pricing Practices: Room for Debate,’ Accountancy (Eng.) (August 1979), pp. 105-6.Google Scholar
  19. Clinton, G.S., ‘Ditton Corvedale Company,’ Management Accounting (Eng.) (February 1978), pp. 69-70, 73.Google Scholar
  20. Cohen, M.D., J.G. March and J.P. Olsen, ‘A Garbage Can Model of Organizational Change,’ Administrative Science Quarterly (March 1972), pp. 1-25.Google Scholar
  21. Cyert, R.M. and J.G. March, A Behavioral Theory of the Firm (Englewood Cliffs, NJ: Prentice-Hall, 1963).Google Scholar
  22. Dagher, S.P., ‘What’s the Price When a Company Buys From Itself?,’ Administrative Management (May 1977), pp. 32, 33, 36, 48, 51, 53, 55, 57.Google Scholar
  23. Davies, J.R., ‘How to Determine Transfer Prices,’ Management Accounting (Eng.) (October 1978), pp. 392-93.Google Scholar
  24. Dearden, J., Cost Accounting and Financial Control Systems (Reading, MA: Addison Wesley, 1973).Google Scholar
  25. Demski, J., ‘Uncertainty and Evaluation Based on Controllable Performance,’ Journal of Accounting Research (Autumn 1976), pp. 230-45.Google Scholar
  26. Dopuch, N. and D.H.F. Drake, ‘Accounting Implications of a Mathematical Programming Approach to the Transfer Price Problem,’ Journal of Accounting Research (Spring 1964), pp. 10-24.Google Scholar
  27. Earnest, K.R., ‘Applying Motivational Theory in Management Accounting,’ Management Accounting (NAA), (December 1979), pp. 41-44.Google Scholar
  28. Eccles, R.G., ‘Control with Fairness in Transfer Pricing,’ Harvard Business Review (November–December 1983), pp. 149-61.Google Scholar
  29. Edwards, J.D. and R.A. Roemmich, ‘Transfer pricing: The Wrong Tool for Performance Evaluation,’ Cost and Management (Can.) (January–February 1976), pp. 35-37.Google Scholar
  30. Emmanuel, C.R., ‘Birch Paper Company: A Possible Solution to the Interdivisional Pricing Problem,’ The Accountant’s Magazine (Scot.) (May 1977a), pp. 196-98.Google Scholar
  31. —, ‘Transfer Pricing: A Diagnosis and Possible Solution to Dysfunctional Decision-Making in the Divisionalized Company,’ Management International Review Vol. 17, No. 4 (1977b), pp. 45–49.Google Scholar
  32. Emmanuel, C.R. and K.P. Gee, ‘Transfer Pricing: A Fair and Neutral Procedure,’ Accounting and Business Research (Autumn 1982), pp. 273-78.Google Scholar
  33. Enzer, H., ‘Static Theory of Transfer Pricing,’ Naval Research Logistics Quarterly, Vol. 22, No. 2 (1975), pp. 375–89.CrossRefGoogle Scholar
  34. Fantl, L., ‘Transfer Pricing — Tread Carefully,’ CPA Journal (December 1974), pp. 42-46.Google Scholar
  35. Ferguson, R., ‘Transfer Pricing: Selecting Suitable Methods,’ (Accounting Principles and Practices), Cost and Management (Can.), (March–April 1981), pp. 53-57.Google Scholar
  36. Ferrara, L., ‘Accounting for Performance Evaluation and Decision-Making,’ Management Accounting (NAA) (December 1976), pp. 13-19.Google Scholar
  37. Finnie, J., ‘Transfer Pricing Practices,’Management Accounting (Eng.) (December 1978), pp. 494-97.Google Scholar
  38. Flavell, R.B., ‘Divisionalization and Transfer Pricing: A Review,’ Omega, Vol. 5, no. 5 (1977), pp. 543–56.CrossRefGoogle Scholar
  39. Granick, D., ‘National Differences in the Use of Internal Transfer Prices,’ California Management Review (Summer 1975), pp. 28-40.Google Scholar
  40. Groves, T. and M. Loeb, ‘Reflections on Social Costs and Benefits and the Transfer Pricing Problem,’ Journal of Public Economics, Vol. 5, 1976, pp. 353–359.CrossRefGoogle Scholar
  41. Gunn, B., ‘Profit Maximization Versus Profit Optimization,’Journal of Contemporary Business (August 1981), pp. 113-23.Google Scholar
  42. Hamner, W.C, and D.W. Organ, Organizational Behavior: An Applied Psychological Approach, (Dallas, TX: Business Publications, Inc., 1978).Google Scholar
  43. Harding, B. and B. Houlden, ‘Using Input-Output Models for Planning in Groups with Considerable Intercompany Trading,’ Long Range planning (June 1980), pp. 35-39.Google Scholar
  44. Harris, M., C.H. Kriebel, and A. Raviv, ‘Asymmetric Information, Incentives and Intrafirm Resource Allocation,’ Management Science (June 1982), pp. 604-20.Google Scholar
  45. Hass, J., ‘Transfer Pricing in a Decentralized Firm,’Management Science (February 1968), pp. B310-B333.Google Scholar
  46. Hayhurst, G., ‘A Proposal for a Corporate Control System,’ Management International Review Vol. 16, No. 2 (1976), pp. 93–103.Google Scholar
  47. Henderson, B.D., and J. Dearden, ‘New System for Divisional Control,’ Harvard Business Review (October 1966), pp. 144-146.Google Scholar
  48. Hilton, I.H., ‘Transfer Pricing’, (Students’ section), Australian Accountant (June 1980), pp. 336-38.Google Scholar
  49. Hirshleifer, J., ‘On the Economics of Transfer Pricing,’ Journal of Business (July 1956), pp. 172-84.Google Scholar
  50. Hurwicz, L., R. Radner, and S. Reiter, ‘A Stochastic Decentralized Resource Allocation Process,’ Econometrica (March 1975), pp. 187-221, (May 1975), pp. 363-93.Google Scholar
  51. Ismail, G.E., ‘Transfer Pricing Under Demand Uncertainty,’ Review of Business and Economic Research (Fall 1982), pp. 1-14.Google Scholar
  52. Jennergren, L.P., ‘Divisionalized Firm Revisited — Comment on Enzer’s “The Static Theory of Transfer Pricing,”’ Naval Research Logistics Quarterly, Vol. 24(2), (1977), pp. 373–76.CrossRefGoogle Scholar
  53. Jones, E.E., and K.E. Davis, ‘From Acts to Dispositions: The Attribution Process in Person Perception,’ in L. Berkowitz (Ed.), Advances in Experimental Social Psychology Vol. 2 (New York: Academic Press, 1965).Google Scholar
  54. Jones, E.E., and R.E. Nisbett, The Actor and the Observer: Divergent Perceptions of the Causes of Behavior (Morristown, NJ: General Learning Press, 1971).Google Scholar
  55. Kanodia, C., ‘Risk Sharing and Transfer Price Systems Under Uncertainty,’ Journal of Accounting Research (Spring 1979), pp. 74-98.Google Scholar
  56. Kaplan, R.S., Advanced Management Accounting (Englewood Cliffs, NJ: Prentice-Hall, Inc., 1982).Google Scholar
  57. —, ‘Application of Quantitative Models in Managerial Accounting: A State of the Art Survey,’ in Management Accounting — State of the Art (Madison, WI, 1977), pp. 29-71.Google Scholar
  58. Kelly, E.E., Attribution in Social Interaction (Morristown, NJ: General Learning Press, 1971).Google Scholar
  59. Kornbluth, J.S.H., ‘Accounting in Multiple Objective Linear Programming,’ The Accounting Review (April 1974), pp. 284-95.Google Scholar
  60. Kydland, F., ‘Hierarchical Decomposition in Linear Economic Models,’ Management Science (May 1975), pp. 1029-39.Google Scholar
  61. Lambert, D.R., ‘Transfer Pricing and Interdivisional Conflict,’ California Management Review (Summer 1979), pp. 70-75.Google Scholar
  62. Larson, R.L., ‘Decentralization in Real Life,’ Management Accounting (NAA) (March 1974), pp. 28-32.Google Scholar
  63. Lawrence, P.R. and J.W. Lorsch, Organization and Environment (Homewood, IL: Richard D. Irwin, 1967).Google Scholar
  64. Leventhal, G.S., ‘Fairness in Social Relationships,’ in L. Thibaut, J.T. Spence, and R.C. Carson (Eds.), Contemporary Topics in Social Psychology (Morristown, NJ: General Learning Press, 1976).Google Scholar
  65. Littrell, E.K., ‘Taking a Dim View of Profits,’ Management Accounting (NAA) (March 1980), p. 60.Google Scholar
  66. Lococo, L.J.,’ selecting the Right Transfer Pricing Model,’ Management Accounting (NAA), (March 1983), pp. 42-5.Google Scholar
  67. Love, C.E., ‘Optimal Equipment Transfer Pricing in Service Systems,’ Journal of the Operational Research Society (July 1980), pp. 657-66.Google Scholar
  68. Lucien, K., ‘Transfer Pricing for the Cost of Funds in a Commercial Bank,’ Management Accounting (NAA), (January 1979), pp. 23-4, 36.Google Scholar
  69. Madison, R. L., ‘Responsibility Accounting and Transfer Pricing: Approach with Caution,’ Management Accounting (NAA), (January 1979), pp. 25-9.Google Scholar
  70. Maier, S.F. and J.H. Vander Weide, ‘Capital Budgeting in the Decentralized Firm,’ Management Science, (December 1976), pp. 433-43.Google Scholar
  71. Mailandt, P., ‘Alternative to Transfer Pricing,’ Business Horizons (October 1975), pp. 81-6.Google Scholar
  72. Manes, R. and R. Verrecchia, ‘A New Proposal for Setting Intra-Company Transfer Prices,’ Accounting and Business Research (Spring 1982), pp. 97-104.Google Scholar
  73. Martin, J.R.,’ segment Planning and Reporting for Firms with Reciprocal Intersegment Transfers,’ Business Economics (May 1981), pp. 25-9.Google Scholar
  74. Mays, R.L., Jr., ‘Divisional Performance Measurement and Transfer Prices,’ Management Accounting (NAA) (April 1982), pp. 20-4.Google Scholar
  75. Mednick, R., ‘Companies Slice and Serve Up Their Financial Results Under FASB 14,’ Financial Executive (March 1979), pp. 45-56, passim.Google Scholar
  76. Metcalf, M., ‘Related Party Transfactions — Why a Standard is Needed,’ Accountancy (May 1979), pp. 99-100.Google Scholar
  77. Miller, G.A., ‘The Magical Number Seven, Plus or Minus Two: Some Limits on Our Capability for Processing Information,’ The Psychological Review Vol. LXIII, No. 2 (March 1956).Google Scholar
  78. Mintzberg, H., Structure in Fives, (Englewood Cliffs, NJ: Prentice-Hall, Inc., 1983).Google Scholar
  79. —, The Structuring of Organizations, (Englewood Cliffs, NJ: Prentice-Hall, Inc., 1979).Google Scholar
  80. Morris, J.R., ‘Application of the Decomposition Principle to Financial Decision Models,’ Journal of Financial and Quantitative Analysis (March 1975), pp. 37-65.Google Scholar
  81. Obel, B. and J.H. Van der Weide, ‘On the Decentralized Capital Budgeting Problem Under Uncertainty,’ Management Science (September 1979), pp. 873-83.Google Scholar
  82. Owens, R.W., ‘Pricing Internal Transfers,’ Internal Auditor (August 1982), pp. 14-17.Google Scholar
  83. —, ‘Pricing Goods and Services of an Internal Service Department,’ Government Accountants Journal (Spring 1981), pp. 43-46.Google Scholar
  84. Porter, L.W., and E.E. Lawler, Managerial Attitudes and Performances, (Homewood, IL: Irwin-Dorsey, 1968).Google Scholar
  85. Ronen, J., ‘Social Costs and Benefits and The Transfer Pricing Problem,’ Journal of Public Economics, Vol. 3, 1974, pp. 71–82.CrossRefGoogle Scholar
  86. Ronen, J., ‘Transfer Pricing — A Synthesis: A Comment’ (Correspondence), The Accounting Review (April 1975), pp. 351-54.Google Scholar
  87. — and Schiff, M., ‘Transfer Pricing for Public Reporting: A Case Study,’ Accounting and Business Research (Eng.) (Autumn 1980), pp. 440-43.Google Scholar
  88. —, ‘Note on Transfer Pricing and Industry Segment Reporting,’ Journal of Accounting, Auditing & Finance (Spring 1979), pp. 224-31.Google Scholar
  89. Schwab, R.J., ‘Contribution Approach to Transfer Pricing,’ Management Accounting (NAA) (February 1975), pp. 46-48.Google Scholar
  90. Sharav, I., ‘Transfer Pricing — Diversity of Goals and Practices,’ Journal of Accountancy (April 1974), pp. 56-62.Google Scholar
  91. Shaub, H.J., ‘Transfer Pricing in a Decentralized Organization,’ Management Accounting (NAA) (April 1978), pp. 33-36.Google Scholar
  92. Simon, H.A., ‘Rationality as Process and as Product of Thought,’ The American Economic Review Proceedings (May 1978), pp. 1-16.Google Scholar
  93. Stern, R.D., ‘Accounting for Intracompany Inventory Transfers,’ Management Accounting (NAA) (September 1980), pp. 41-44.Google Scholar
  94. Swieringa, R.J. and J.H. Waterhouse, ‘Organizational Views of Transfer Pricing,’ Accounting, Organizations and Society (1982), pp. 149-65.Google Scholar
  95. Tang, R.Y.W., ‘Canadian Transfer Pricing Practices,’ CA Magazine (Can.) (March 1980), pp. 32-38.Google Scholar
  96. —, Transfer Pricing Practices in the United States and Japan (New York: Praeger, 1979).Google Scholar
  97. Tang, R.Y.W., C.K. Walter and R.H. Raymond, ‘Transfer Pricing — Japanese vs. American Style,’ Management Accounting (NAA) (January 1979), pp. 12-16.Google Scholar
  98. Tewes, J.A., ‘Valuing Bank Funds for Allocation and Pricing Decisions,’ Management Accounting (NAA) (November 1976), pp. 27-33.Google Scholar
  99. Thomas, A.L., A Behavioral Analysis of Joint-Cost Allocation and Transfer Pricing, Arthur Andersen & Co. Lecture Series — 1977, (Champaign, IL: Stipes Publishing Company, 1980).Google Scholar
  100. Tyler, W.H. and R. Fridholm, ‘Internal Transfer Price of Bank Funds,’ Burroughs Clearing House (March 1975), pp. 18-19, 56, 58-59.Google Scholar
  101. Vancil, R.F. Decentralization: Management Ambiguity by Design, (Homewood, IL: Dow Jones-Irwin, 1979).Google Scholar
  102. Vroom, V.H., Work and Motivation, (New York: John Wiley and Sons, Inc., 1964).Google Scholar
  103. Walster, E., G.W. Walster, and E. Berscheid, Equity: Theory and Research (Boston, MA: Allyn and Bacon, Inc., 1978).Google Scholar
  104. Watson, D.J.H. and J.V. Baumler, ‘Transfer Pricing: A Behavioral Context,’ The Accounting Review (July 1975), pp. 466-74.Google Scholar
  105. Weick, K.E., The Social Psychology of Organizing 2d ed. (Reading, MA: Addison-Wesley 1979)., The Social Psychology of Organizing, (Reading, MA: Addison-Wesley, 1969).Google Scholar
  106. Weitzman, M., ‘Iterative Multilevel Planning with Production Targets,’ Econometrica, Vol. 38, No. 1, (January 1970), pp. 50–65.CrossRefGoogle Scholar
  107. Williamson, O. E., Markets and Hierarchies: Analysis and Antitrust Implications: A Study in the Economics of Internal Organization (New York: The Free Press, 1975).Google Scholar
  108. Wraith, P., ‘Taking a Bitter Medicine,’ Accountant (January 6, 1983), pp. 16-17.Google Scholar
  109. Wu, F.H. and D. Sharp, ‘An Empirical Study of Transfer Pricing,’ The International Journal of Accounting Education and Research (Spring 1979), pp. 71-99.Google Scholar
  110. Young, A., ‘Birch Paper Company: A Transfer Pricing Case Study’ (Students’ Section), Accountant’s Magazine (Scot.) (August 1976a), pp. 308-11.Google Scholar
  111. —, ‘Interdivisional Transfer Pricing’ (Students’ Section), Accountant’s Magazine (Scot.) (March 1976b), pp. 103-6.Google Scholar

Annotated Bibliography

  1. 1.
    Abdel-khalik, A. and E.J. Lusk, ‘Transfer Pricing-A Synthesis,’ The Accounting Review (January 1974), pp. 8-23.Google Scholar
  2. 2.
    Ackelsberg R. and G. Yukl, ‘Negotiated Transfer Pricing and Conflict Resolution in Organizations.’ Decision Sciences, Vol. 10 (July 1979), pp. 387–398.CrossRefGoogle Scholar
  3. 3.
    Bailey, R.L. and W.J. Boe, ‘Goal and Resource Transfers in the Multigoal Organization.’ The Accounting Review (July 1976), pp. 559-573.Google Scholar
  4. 4.
    Benke, R.L., and J.D. Edwards, Transfer Pricing: Techniques and Uses. New York, NY: National Association of Accountants, 1980).Google Scholar
  5. 5.
    Eccles, R.G., ‘Control with Fairness in Transfer Pricing.’ Harvard Business Review (November–December 1983), pp. 149-161.Google Scholar
  6. 6.
    Granick, D., ‘National Differences in the Use of Internal Transfer Prices.’ California Management Review (Summer 1975), pp. 28-40.Google Scholar
  7. 7.
    Swieringa, R.J. and J.H. Waterhouse, ‘Organizational Views of Transfer Pricing’, Accounting, Organizations and Society (1982), pp. 149-165.Google Scholar
  8. 8.
    Tang, Y.W., Transfer Pricing Practices in the United States and Japan (New York: Praeger, 1979).Google Scholar
  9. 9.
    Thomas, A.L., A Behavioral Analysis of Joint Cost Allocation and Transfer Pricing. Arthur Andersen & Co. Lecture Series 1977 (Champaign, IL: Stipes Publishing Company, 1980).Google Scholar
  10. 10.
    Vancil, R.F., Decentralization: Management Ambiguity by Design (Home-wood, IL: Dow Jones-Irwin, 1979).Google Scholar
  11. 11.
    Watson, D.J.H. and J.V. Baumler, ‘Transfer Pricing: A Behavioral Context,’ The Accounting Review (July 1975), pp. 466-474.Google Scholar

Copyright information

© Springer Science+Business Media Dordrecht 1985

Authors and Affiliations

  • Severin V. Grabski
    • 1
  1. 1.Michigan State UniversityUSA

Personalised recommendations