The large size firms divide their operation very often into product decisions or subsidiaries. Growing firms add new divisions or departments to the existing ones. The firm then transfer some of their activities to other division. The goods or services produced buy other divisions are used by the parent organization. In other word, the parent division buys the product of its subsidiaries. Such firms face the problem of determining the appropriate price for the product transferred from one division or subsidiary to the other. Specifically, the problem is of determining the price of a product produced by one division of the same firm. This problem becomes much more difficult when each division has a separate profit function to maximize. Price of intra-firm ‘transfer product’ is referred to as “Transfer pricing”.
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