Collaboration, Interdependency, and Transfer Pricing

ABSTRACT

Entities often make decisions and engage in activities that may have an effect on other entities (e.g., airport security, health information exchanges, cloud computing, interdependencies in information security). We modify the prisoner’s dilemma for our interdependent setting in the lab, with two players in each interdependent group. We implement a payoff structure using expected values to simulate demand uncertainty. Treatments consider several transfer pricing mechanisms: no transfer pricing; endogenously-determined transfer pricing; and endogenously-determined transfer pricing with asymmetric payoff revelation. We draw conclusions about the ability for subjects to achieve the socially-optimal level of collaboration, and also conduct a behavioral analysis on the consequences of expected values on decision-making.