Specific investments under negotiated transfer pricing: effects of different surplus sharing parameters on managerial performance: An agent-based simulation with fuzzy Q-learning agents

Abstract: This paper focuses on a decentralized profit-center firm that uses negotiated transfer pricing as an instrument to coordinate the production process. Moreover, the firm's headquarters gives its divisions full authority over operating decisions and it is assumed that each division can additionally make an upfront investment decision that enhances the value of internal trade. On early works, the paper expands the number of divisions by one downstream division and relaxes basic assumptions, such as the assumption of common knowledge of rationality. Based on an agent-based simulation, it is examined whether cognitively bounded individuals modeled by fuzzy Q-learning achieve the same results as fully rational utility maximizers. In addition, the paper investigates different constellations of bargaining power to see whether a deviation from the recommended optimal bargaining power leads to a higher managerial performance. The simulation results show that fuzzy Q-learning agents perform at least as well or better than fully individual rational utility maximizers. The study also indicates that, in scenarios with different marginal costs of divisions, a deviation from the recommended optimal distribution ratio of the bargaining power of divisions can lead to higher investment levels and, thus, to an increase in the headquarters' profit.