Q. Market based approaches?

Cost based approaches to transfer pricing can ignore what external competition would charge, therefore 'open (external) market price' could be used internally as a transfer price to encourage greater market efficiency and goal congruence.  When the external market price is used as a transfer price, a seller will always be encouraged to sell because they would be indifferent between their charging policies for internal or external customers. An internal buyer generally would not want to pay any higher than what the external market price is, it should therefore not discourage them from buying internally if a fair market price is charged.

The main problem with market based approaches is that establishing a market price can be difficult, different suppliers will quote different prices, the price may be affected by such factors as quality, quantity, discounts and credit terms available.  In some cases no intermediate market exists, therefore a comparable market product and price may not be available.