Intangible capital, hedonic pricing, and international transfer prices

The international transfer pricing norm is the ''arm's length'' standard where prices are set as if related parties were transacting as unrelated parties. The modem theory of the firm, however argues that the types of transactions that take place within firms differ significantly from market transactions. This article provides an econometric technique that permits an accurate allocation of income for certain transactions involving vertically integrated firms employing intangible capital. The proposed technique, illustrated with reference to the premium North American banana trade, is to isolate revenue streams associated with specific product characteristics. When dimensions of quality can be measured, hedonic pricing models can be used to isolate unique quality-characteristic contribution margins, relate them to intangible capital,and assign arm's length returns to such assets in a transfer pricing calculation.