Wholesale Transfer Pricing…

The bargaining power of Company A that supplies a product XYZ to Company B which may enable Company A to take the profits of Company B by increasing the wholesale price of product XYZ.

Every business has a value chain and profit pools. How profit is allocated between the layers in the value chain is determined by the relative transfer pricing.

“Wholesale transfer pricing” is similar to the “hold-up problem”.

Michael Porters Five Forces — via the ‘bargaining power of suppliers’ demonstrates the potential of “wholesale transfer pricing”.

Examples of “wholesale transfer pricing”…

John Malone — As CEO of TCI, he would provide distribution on his cable system in exchange for X% of the equity in the suppliers company. When Bob Johnson wanted to launch BET on Malone’s cable system, Malone offered to carry his channel in exchange for 20% of BET’s business. The deal worked out incredibly well for both companies.

Apple neutered the pricing power of the music labels by making a profit on the sale of the iPod/iPhone. If Apple had sold the devices at a loss and tried to solely make a profit on the music, it would be pressured by the ‘wholesale transfer pricing’ of the music owners.

Owning both the pipe and the water flowing through it is one way to mitigate against ‘wholesale transfer pricing’. Leveraging scale and purchasing power can help control input costs if you make up a big percentage of the market or suppliers distribution.

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