Transfer pricing refers to the pricing of an intermediate product or service within a firm. This product or service is transferred between two divisions of the firm. Thus, transfer pricing is closely related to the allocation of profits in a supply chain. Motivated by the significant impact of transfer pricing methods for tax purposes on operational decisions and the corresponding profits of a supply chain, in this article, we study a decentralized supply chain of a multinational firm consisting of two divisions: a manufacturing division and a retail division. These two divisions are located in different countries under demand uncertainty. The retail division orders an intermediate product from the upstream manufacturing division and sets the retail price under random customer demand. The manufacturing division accepts or rejects the retail division's order. We specifically consider two commonly used transfer pricing methods for tax purposes: the cost‐plus method and the resale‐price method. We compare the supply chain profits under these two methods. Based on the newsvendor framework, our analysis shows that the cost‐plus method tends to allocate a higher percentage of profit to the retail division, whereas the resale‐price method tends to achieve a higher firm‐wide profit. However, as the variability of demand increases, our numerical study suggests that the firm‐wide and divisional profits tend to be higher under the cost‐plus method than they are under the resale‐price method. © 2013 Wiley Periodicals, Inc. Naval Research Logistics, 2013
One of the most important decisions that a firm faces in managing its supply chain is a procurement decision: selecting suitable suppliers among many potential competing sellers and reducing the purchase cost. While both auction and bargaining have been extensively studied in the literature, the research that combines both auction and bargaining is limited. In this paper, we consider a combined auction-bargaining model in a setting where a single buyer procures an indivisible good from one of many competing sellers. The procurement model that we analyze is a sequential model consisting of the auction phase followed by the bargaining phase. In the auction phase, the sellers submit bids, and the seller with the lowest bid is selected as the winning bidder. In the bargaining phase, the buyer audits the cost of the winning seller and then negotiates with him to determine the final price. For this auction-bargaining model, we find a symmetric bidding strategy equilibrium for the sellers in a closed form, which is simple to understand and closely related to the classical results in the auction and bargaining literature. We also show that the auction-bargaining model generates at least as much profit to the buyer as the standard auction or sequential bargaining model.
A lockup period for investment in a hedge fund is a time period after making the investment during which the investor cannot freely redeem his investment. It is routine to have a one-year lockup period, but recently the requested lockup periods have grown longer. We estimate the premium for such extended lockup, taking the point of view of a manager of a fund of funds, who has to choose between two investments in similar funds in the same strategy category, the first having a one-year lockup and the second having an n-year lockup. Assuming that the manager will rebalance his portfolio of hedge funds on a yearly basis, if permitted, we define the annual lockup premium as the difference between the rates of return from these investments. We develop a Markov chain model to estimate this lockup premium. By solving systems of equations, we fit the Markov chain transition probabilities to three directly observable hedge fund performance measures: the persistence of return, the variance of return and the hedge-fund death rate. The model quantifies the way the lockup premium depends on these parameters. Data from the TASS database are used to estimate the persistence, which is found to be statistically significant. Keywordshedge funds, liquidity, extended hedge fund lockups, persistence of hedge fund returns, Markov chains, stochastic processes Published online in Wiley InterScience | wilmott Journal | 265where δ is the death rate, γ is the persistence and σ is the standard deviation of the yearly relative returns (under parametric assumptions to be explained later).Organization of the paper. We start in Section 2 by reviewing the related literature on liquidity, including premiums for hedge fund lockup. In Section 3 we carefully specify what we mean by the lockup premium. In Section 4 we discuss persistence of hedge fund returns, reviewing the literature and analyzingPublished online in Wiley InterScience |
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