Marketing considerations and competition

There are a number of reasons why a multinational firm may depend on its foreign subsidiaries for the sale of finished goods.One reason is the desire to control the distribution facilities when there is a lucrative market.Another reason is the desire to provide specialized after-sale services.There is also the need to convey information to and from customers.And there may be a need to retain direct representation in order to maintain contacts with foreign governments.All of these marketing considerations can be built into transfer pricing policies.

If this is the case, then the marketing objective will influence transfer pricing.For example, initial transfer prices should be lower if the subsidiary is expected to pursue the objective of market penetration (obtaining a foothold in and then a big share of a market)than if the underlying marketing objective is market skimming (targeting customers who are willing to pay a high price for the underlying product).