We investigate how multinational two-sided platform firms set their prices on intra-firm transactions. Two-sided platform firms derive income from two customer groups that are connected through at least one positive network externality from one group to the other. A main finding is that, even in the absence of taxation, transfer prices deviate from marginal cost of production. A second result of the paper is that it is inherently difficult to establish arm’s length prices in two-sided markets. Finally, we find that differences in national tax rates may be welfare enhancing, despite the use of (abusive) transfer prices as a profit-shifting device.

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International Journal of the Economics of Business
Erasmus School of Economics

Schindler, D.S., & Schjelderup, G. (2010). Profit Shifting in Two-Sided Markets. International Journal of the Economics of Business, 17(3), 373–383. Retrieved from http://hdl.handle.net/1765/124626