Transfer pricing mechanisms: An experimental investigation

The purpose of this study was to evaluate, in a laboratory experiment, the performance of the Ronen/McKinney (1970) and the Ronen (1992) transfer pricing models. With the Ronen/McKinney scheme, when the subjects were able to coordinate their messages, they engaged in collusive behavior and earned profits significantly higher than the profits they could have made under the overall optimal solution. The inclusion of the penalty factor in the Ronen/McKinney scheme (the Ronen (1992) scheme) eliminated the collusive behavior.;The Ronen mechanism continued to attain higher efficiency and less misreporting than the Ronen/McKinney scheme when the trading rules did not allow for coordination of messages. An investigation of the subjects' trading patterns suggested that this difference in performance was due to the anchoring property of the penalty factor.