Game-theoretic models of the transfer pricing problem

The purpose of this dissertation is to use game theory to analyze several transfer pricing policies currently used in industry in order to study the effects these policies have on overall corporate profit. By using the novel approach of modelling the transfers between two divisions as incomplete information noncooperative games, the effects of the division managers' strategies on expected corporate profit are derived.;Two explicit issues addressed in the dissertation include informational asymmetry and the divergence of preferences. Informational asymmetry is modelled by assuming that only the manager of a particular division has complete information with respect to that division's costs of production. Thus, neither another division manager nor top management knows with certainty a particular division's costs. Divergence of preferences is modelled by assuming that each divisional manager is acting in order to maximize his expected divisional profit. Acting in such a way may be counter to the maximization of expected total corporate profit, which is assumed to be the goal of top management.;The analysis contained in this dissertation is designed to be used as the basis of a decision support system to aid corporate management in determining the appropriateness of certain transfer pricing methods in various situations.