Negotiating transfer pricing using the Nash bargaining solution

Abstract

This paper analyzes and proposes a solution to the transfer pricing problem from the point of view of the Nash bargaining game theory approach. We consider a firm consisting of several divisions with sequential transfers, in which central management provides a transfer price decision that enables maximization of operating profits. Price transferring between divisions is negotiable throughout the bargaining approach. Initially, we consider a disagreement point (status quo) between the divisions of the firm, which plays the role of a deterrent. We propose a framework and a method based on the Nash equilibrium approach for computing the disagreement point. Then, we introduce a bargaining solution, which is a single-valued function that selects an outcome from the feasible pay-offs for each bargaining problem that is a result of cooperation of the divisions of the firm involved in the transfer pricing problem. The agreement reached by the divisions in the game is the most preferred alternative within the set of feasible outcomes, which produces a profit-maximizing allocation of the transfer price between divisions. For computing the bargaining solution, we propose an optimization method. An example illustrating the usefulness of the method is presented.

Price coordination in closed-loop data supply chain

“…As it is the case with Iyer and Villas-Boas (2003), the channel members make the price decisions through bargaining. In order to obtain analytical solutions, we adopt Nash bargaining solution (Nash, 1950;Binmore et al, 1986;Ghosh and Shah, 2015;Clempner and Poznyak, 2018) and we call this pricing mechanism Nash bargaining pricing (denoted by superscript B). Under this pricing mechanism, the expected profit functions of the data provider, the application provider, and the data supply chain are as follows:…”

On Lyapunov Game Theory Equilibrium: Static and Dynamic Approaches

“…This paper suggests a game theory problem in which any feasible solution is based on the Lyapunov theory, sometimes missing in the literature, which is a fundamental concept in Control and Game Theory. For a survey about potential games see González-Sánchez and Hernández-Lerma [2016]. Lyapunov games naturally define potential games.…”