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hi john,
why is that using a market transfer price will act as an disincentive to use spare capacity/
Because it is likely to give too high a price to be profitable for the other division to buy, and if the other division doesn’t by the the selling division won’t produce.
It is profitable for the selling division to produce provided the transfer price is anything above the marginal cost (given that there is spare capacity).
Have you watched my free lectures on transfer pricing?
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