INTANGIBLE CAPITAL, HEDONIC PRICING, AND INTERNATIONAL TRANSFER PRICES

The international transfer pricing norm is the ''arm's length'' standa rd where prices are set as if related parties were transacting as unre lated parties. The modem theory of the firm, however argues that the t ypes of transactions that take place within firms differ significantly from market transactions. This article provides an econometric techni que that permits an accurate allocation of income for certain transact ions involving vertically integrated firms employing intangible capita l. The proposed technique, illustrated with reference to the premium N orth American banana trade, is to isolate revenue streams associated w ith specific product characteristics. When dimensions of quality can b e measured, hedonic pricing models can be used to isolate unique quali ty-characteristic contribution margins, relate them to intangible capi tal,and assign arm's length returns to such assets in a transfer prici ng calculation.