A game-theoretic approach to transfer pricing in a vertically integrated supply chain

We study the problem of setting transfer prices in a vertically integrated supply chain, in which the divisions share technology and transactions costs. We develop a cooperative game that provides transfer prices for the intermediate products in the supply chain. This model is applied both when the market prices for these products are known and also when their valuations differ. We provide a solution that is fair and acceptable to all divisions. In the perfect information case, the Shapley value generates the transfer prices, while in the asymmetric case we obtain transfer prices from the solution to a linear program. (C) 2008 Elsevier B.V. All rights reserved.