Alberto Salvo

Assistant Professor of Management & Strategy

Teaches: INTL-460, International Business Strategy, Spring '08

Concrete Threats: Inferring market power under the threat of entry

During the summer of 2007, a couple of months after finishing a draft of a paper on the Brazilian cement industry, Alberto Salvo received a phone call from Elizabeth Farina, President of Brazil’s Administrative Council for Economic Defense, an antitrust authority that is part of the Ministry of Justice. An economist herself, Farina was frustrated with what she considered the misapplication of an econometric technique used to test companies for anti-competitive behavior. She specifically cited the case of an industry (unrelated to cement) charged by the Brazilian competition authorities with price-fixing. The government had gathered substantial direct evidence—the so-called “smoking gun"—against the alleged cartel, including records of private meetings among executives of the different firms, other company documents, and testimony by whistleblowers. Yet, in the course of the legal proceedings, consulting firms hired by the defendants had presented statistical tests they claimed proved their clients enjoyed no market power and, hence, were behaving in “perfect competition.” Recalling a 2004 talk he had given regarding the unreliability of these kinds of statistical tests, Farina asked Professor Salvo to write a policy document which could help her with this current case.

Ronald A. Dye

Leonard Spacek Professor of Accounting Information & Mngt; Chair of Accounting Information & Management Department

Teaches: ACCT-430, Accounting for Decision Making and ACCT-520, Seminar on Agency Theory and Information Economics, Spring ‘08

Cost-Sharing Agreements: A tax-saving device for multi-nationals

Most managers who work in international businesses are aware that transfer prices — that is, the prices one division of their business pays or receives for products and/or services supplied to or acquired from its other divisions — can have a large effect on their total tax bill and their overall corporate-wide profitability. These tax consequences arise because of the differences in tax rates across the jurisdictions in which the various divisions of the company do business. Most managers also know that choosing transfer prices in a way that both minimizes a firm's tax liability and receives the approval of tax authorities is among the most important tax issues that their firms face. While transfer pricing regulations try to restrict firms' choices by requiring that the prices charged for the transfers of internal products or services occur at "arm's length" or market prices, firms often have discretion in selecting transfer prices because these internally transferred products or services have no identical external, or market, counterparts.