DISCUSSION OF Distortions Caused by the Use of Arm's Length Transfer Prices.

The article presents a comment on the research paper by David G. Harris and Richard C. Sansing on the distortions caused by the use of arm's-length transfer prices. According to the author the paper examines an interesting tension between the double marginalization problem with independent firms in comparison to the value of better information of local market conditions. The author find this paper to be well written, its development articulate, its modeling rigorous, yet clean and simple, and its insights clear. As in most theoretical work, the results and insights from the model depend critically on the assumptions made by the authors to support theft approach. The paper develops a model of organizational form choice in which vertical integration is preferred in some countries while the use of an independent retailer is preferred in others. One of the critical assumption of the paper is that the independent seller knows the realization of its demand parameter prior to setting price, while the controlled seller of the vertically integrated firm does not.