Negotiated prices

Where market based prices are not applicable, it has been argued that allowing managers to bargain with each other in order to establish transfer prices develops the kind of management skills which are necessary to the future of the enterprise. Managers would need to have detailed knowledge of their own resources and costs and would need to apply their inter-personal skills of communication, persuasiveness and bargaining in order to show a profit.  Negotiated prices thus stress the human behavioral aspects of the organization. Social and political skill can be translated into good divisional performance, as measured by the accounting system.

Unfortunately, negotiated prices can also lead to conflict, especially where two managers cannot agree on a transfer price. In such circumstances, a mechanism for resolving the dispute is required at a central level. The intervention of central authority to resolve conflicts clearly results in a loss of autonomy with dysfunctional consequences. A system which aims to reveal the behavioral skills of managers can as easily reward those who can manipulate the inherent tensions between centre and divisions to their best advantage.