Bilateral bargaining: Approaching certainty under the split- the-difference mechanism.

In many corporations, one division makes a product that another uses. Often, such a company would like the divisions to act as profit centers; that is, the producing division should sell the product to the consuming one. Thus, the firm faces the problem of transfer pricing; it must determine when trade should take place, and, if it does, at what price. Usually this problem is characterized by incomplete information: the buyer knows her own benefit of buying the object, but has less specific information about the seller's costs. In the model used in this paper, this information is in the form of a probability distribution. One way to determine the transfer price is through a bargaining mechanism. Both the buyer and seller submit a bid, based on the true benefit and cost of each, to company headquarters where the mechanism determines the probability of transfer and the transfer price, given the two bids.