Abstract This article presents a response to comments on the proposed a model of transfer pricing in a socialist economy setting. Over the years an enormous body of literature has accumulated on the limitations of market determined prices as an instrument for the administration of an economic system. There are problems when perfect competition and/or government intervention are present in addition to the problems that arise when these conditions do not exist. Considering the brevity of Kenneth Most's comment, it is remarkable for its coverage of the literature on the subject. Furthermore, it may be useful to be reminded of the fact that these problems do not disappear when a socialist government employs transfer prices to facilitate the administration of its economy. How such a system would deal with these problems and whether these solutions would be more or less effective than the solutions available to a regulated capitalist economy is a subject for further research. A. Rashad Abdel-khalik argues that under the conditions specified, it appears that the proposed transfer price system will augment the employees' bonus for any period as compared to the preceding period by a function of the unfavorable deviation in fixed costs in period. If this statement were correct, the transfer price system would be less than useless, since a firm's management could maximize its income by maximizing costs. Abdel-khalik's argument is incorrect, but his concern with the control of organization costs is well placed.
M. J. Gordon (Fri,) studied this question.