Gray markets and multinational transfer pricing

Romana L. Autrey, Francesco Bova

Research output: Contribution to journalArticle

Abstract

Gray markets arise when a manufacturer's products are sold outside of its authorized channels, for instance when goods designated by a multinational firm for sale in a foreign market are resold domestically. One method multinationals use to combat gray markets is to increase transfer prices to foreign subsidiaries in order to increase the gray market's cost base. We illustrate that, when a gray market competitor exists, the optimal transfer price to a foreign subsidiary exceeds marginal cost and is decreasing in the competitiveness of the domestic market. However, a multinational's discretion in setting transfer prices may be limited by mandatory arm's length transfer pricing rules. Provided gray markets exist, we characterize when mandating arm's length transfer pricing lowers domestic social welfare relative to unrestricted transfer pricing. We also demonstrate that gray markets can lead to higher domestic tax revenues, even when gray market firms do not pay taxes domestically.

Original languageEnglish (US)
Pages (from-to)393-421
Number of pages29
JournalAccounting Review
Volume87
Issue number2
DOIs
StatePublished - Mar 2012

Keywords

  • Gray markets
  • Regulation
  • Transfer pricing

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Gray markets and multinational transfer pricing'. Together they form a unique fingerprint.

  • Cite this