Transfer pricing in a multidivisional firm: A cooperative game analysis

We consider the transfer pricing decision for a multidivisional firm with an upstream division and multiple downstream divisions. The downstream divisions can independently determine their retail prices, and decide on whether or not they will purchase from the upstream division at negotiated transfer prices. To allocate the firm-wide profit between upstream and downstream divisions, we construct a cooperative game, show the convexity of the game, and then compute the Shapley value-based transfer prices for the firm.