To eliminate the problems of defining “cost” some companies simply use a market price approach to setting transfer prices. Market price is believed to be an objective, arm’s-lenght measure of value that simulates the selling price that would be offered and paid if the subunits were independent, autonomous companies. If a selling division is operating efficiently relative to its competition, it should be able to show a profit when transferring products of services at market prices. Similarly, an efficiently operating buying division should not be troubled by a market based transfer price because that is what would have to be paid for the goods or services if the alternative of buying internally did not exist.

Several problems may, however, exist with the use of market prices for intra companies transfers. First, transfers can involve products having no exact counterpart in the external market. Second, market price is not entirely appropriate because internal sales can provide cost savings by reducing bad debts and/or packaging, advertising, or delivery expenditures. Third, if the external market is experiencing a temporary reduction in demand for the product.