ABSTRACT
Consider a firm which produces an (intermediate) output in one plant or division and uses it as an input in another plant or division. If there is a well defined external market for the good where units can be bought and sold at a common price w, then there is no transfer price problem: the firm should value the intermediate good at the-price w in both plants. However, in many cases, such well defined 'arm's-length' transfer prices will not exist. In this case, how should the firm choose its transfer price for the good?
