ABSTRACT
Transfer prices are the prices charged when one division of a firm sells a product or service to another division of the same firm. If the firm were run by a central administration, then transfer prices would serve merely an accounting function or as a device for distributing income. However, since Yugoslav enterprises consist of autonomous divisions, transfer prices affect input and output decisions and hence the overall efficiency of the firm. It is well known that a labor-managed economy may suffer from immobility of labor between firms where marginal productivity is high and those where it is low. It is not, however, widely recognized that this same inefficiency can occur with regard to the allocation of labor within a decentralized firm. An important question is whether the efficiency loss from non-optimal transfer prices is the same in the labor-managed enterprise as in the capitalist enterprise. The answer hinges on the elasticities of the marginal cost and marginal revenue curves.
