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Profit-shifting in Two-sided Markets

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Abstract

We investigate how multinational two-sided platform firms set their prices on intra firm transactions. Two-sided platform firms derive income from two customer groups that are connected through at least one positive network externality from one group to the other. A main finding is that even in the absence of taxation transfer prices deviate from marginal cost of production. A second result of the paper is that it is inherently difficult to establish arm's length prices in two-sided markets. Finally, we find that differences in national tax rates may be welfare enhancing despite the use of such prices as a profit shifting device.

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  • Schindler, Dirk & Schjelderup, Guttorm, 2009. "Profit-shifting in Two-sided Markets," Discussion Papers 2009/1, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2009_001
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    File URL: http://hdl.handle.net/11250/163962
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    1. Jean‐Charles Rochet & Jean Tirole, 2006. "Two‐sided markets: a progress report," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 645-667, September.
    2. Hines, James R. Jr., 1999. "Lessons From Behavioral Responses to International Taxation," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(2), pages 305-322, June.
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    5. Kind, Hans Jarle & Midelfart, Karen Helene & Schjelderup, Guttorm, 2005. "Corporate tax systems, multinational enterprises, and economic integration," Journal of International Economics, Elsevier, vol. 65(2), pages 507-521, March.
    6. Alfons Weichenrieder, 1996. "Fighting international tax avoidance," Fiscal Studies, Institute for Fiscal Studies, vol. 17(1), pages 37-58, February.
    7. Jean-Charles Rochet & Jean Tirole, 2003. "Platform Competition in Two-Sided Markets," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 990-1029, June.
    8. Evans David S., 2003. "Some Empirical Aspects of Multi-sided Platform Industries," Review of Network Economics, De Gruyter, vol. 2(3), pages 1-19, September.
    9. Horst, Thomas, 1971. "The Theory of the Multinational Firm: Optimal Behavior under Different Tariff and Tax Rates," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 1059-1072, Sept.-Oct.
    10. Collins, J & Kemsley, D & Lang, M, 1998. "Cross-jurisdictional income shifting and earnings valuation," Journal of Accounting Research, Wiley Blackwell, vol. 36(2), pages 209-229.
    11. Jack Hirshleifer, 1956. "On the Economics of Transfer Pricing," The Journal of Business, University of Chicago Press, vol. 29, pages 172-172.
    12. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(1), pages 149-182.
    13. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
    14. Jean-Charles Rochet Author-Email:rochet@cict.fr Author-Workplace-Name: IDEI, University of Toulouse & Jean Tirole Author-Email: tirole@cict.fr Author-Workplace-Name: IDEI, University of Toulouse, 2006. "Two-Sided Markets: A Progress Report," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 645-667, Autumn.
    15. John Christian Langli & Shahrokh Saudagaran, 2004. "Taxable income differences between foreign and domestic controlled corporations in Norway," European Accounting Review, Taylor & Francis Journals, vol. 13(4), pages 713-741.
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    Cited by:

    1. Marko Köthenbürger, 2020. "Taxation of Digital Platforms," EconPol Working Paper 41, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. Florian Baumann & Tim Friehe, 2013. "Profit Shifting Despite Symmetric Tax Rates? A Note on the Role of Tax Enforcement," International Economic Journal, Taylor & Francis Journals, vol. 27(1), pages 97-108, March.
    3. Kind, Hans Jarle & Schjelderup, Guttorm, 2024. "Taxation and Multi-Sided Platforms: A Review," Discussion Papers 2024/12, Norwegian School of Economics, Department of Business and Management Science.

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    More about this item

    Keywords

    Multinational enterprises; two-sided markets; profit shifting;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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