However, as information technology improves, the informational advantage diminishes; the opportunity costs of managers' bargaining eventually dominate, and cost-based methods generate higher profits.
With coarse information technology, negotiated transfer pricing has an informational advantage: managers agree to prices that approximate the firm's cost of internal trade more precisely than cost-based transfer prices.
The answer reflects a trade-off between the informational advantage of discretion - that adjudicators can act on information not included in rules - and the disadvantage of discretion - that decisions may deviate from the desirable because adjudicators' objectives are different from society's.
Firms benefit ex-ante from better consumer information about quality or from committing to not exploit their informational advantage.
Unlike companies that sell an informational advantage, however, the key to insider trading is keeping the information confidential and not letting anyone know you are using it to profit.
