Abstract
This thesis we extends the Holm(1997) framework to analysis how the application of APA in the host country impacts the multinational enterprise’s transfer pricing behavior. We find the following results. First, under Cournot competition, the optimal transfer price of the MNE could be lower than the marginal cost even in the presence of profit taxes and import tariffs. Second, in a linear demand model, we prove that the optimal transfer price would shift the MNE’s Cournot equilibrium to the Stackelberg leader position. Third, with the transfer pricing penalty scheme or if the government take a more severe attitude, we derive that the MNE would reduce the extent to which it distorts the transfer price. Fourth, we find that if the negotiated transfer price is in a specific range, the MNE would join the APA to secure higher total profits.