Transfer Pricing and Hold-Ups in Supply Chains

Abstract. We reconsider the hold‐up problem under symmetric information when more than two parties form a ‘supply chain’. The parties are assumed to renegotiate bilaterally and sequentially. Potential trade distortions then arise in addition to the usual investment problem. Following Edlin and Reichelstein (1995, 1996), we consider fixed‐quantity contracts. First‐best allocations are shown to be attainable if the parties are able to commit to a ‘forced‐compliance’ regime where a central office monitors the consistency of the bilateral renegotiations.