Description

The central theme of Competition and Cost Accounting is that strategic considerations may make it desirable for a firm to have divisions and product managers internalize something other than their true costs. In the case of transfer prices, a high transfer price serves as a means of promoting tacit collusion. When transfer prices are not observable to the rival firm, decentralization, motivated by the superior knowledge of divisions about their own costs, can promote tacit collusion. In the case of product cost measurement, an inferior cost allocation system that just spreads costs evenly can promote tacit collusion. The authors show that it may not be an equilibrium for firms to adopt a more accurate cost system or compete in multiple markets. The strategic nature of their interaction with their rivals may influence their cost and cost accounting choices in surprising ways. After an introduction, the authors analyze the strategic value of transfer prices in both Bertrand and Cournot settings. They demonstrate the importance of observability and commitment, and show that even in the absence of observability and commitment, decentralization to exploit the private information of upstream managers can have strategic consequences through double marginalization. These strategic effects become stronger with observability and commitment. They also analyze the strategic value of cost allocation systems in both Bertrand and Cournot settings before concluding the monograph.