Inter-Company Price Revisited: Passage From Monopoly Competition to the Realm of Corporate Financial Reporting

Abstract

This paper develops a theory of inter-company price or pricing (ICP) within the framework of monopoly competition as a form of imperfect rivalry and performs an analytical application showing its direct association with corporate financial reporting in general and corporate financial statements in particular. For this purpose, cost advantage and operating profit are served as catalysts to build the theory and apply it into accounting practice. In other words, cost advantage and operating profits are considered and constructed as keys to show and explain the interplay between ICP and corporate financial reporting in general and corporate financial statements in particular. Examinations document that given that businesses transact with each other under bilateral monopoly competition; ceteris paribus, the operating profit figure of the business with cost advantage will be higher than the operating profit (OP) figure of the business without cost advantage. Examinations further document that businesses transact with each other under bilateral monopoly competition; ceteris paribus, asset size, earnings before interest and taxes (EBIT), earnings before taxes (EBT) and hence net income/profit after tax (NPAT) figures of the business with cost advantage will always be higher than asset size, EBIT, EBT and therefore NPAT figures of the business without cost advantage.