Intangible Capital, Hedonic Pricing, and International Transfer Prices

The intemational transfer pricing norm is the "arm's length" standard where prices are set as tf related parttes were transacting as unrelated parties. The modern 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 mtegrated firms employing intangible capttal. The proposed technique, illustrated with reference to the premium North American banana trade, is to isolate revenue streams assoctated with specific product characteristics. When dimensions of quahty can be measured, hedontc prictng models can be used to isolate umque quality-characteristic contribution margins, relate them to tntangible capital, and assign arm's length returns to such assets in a transfer pricing calculation.