Abstract Decentralization is recommended by organization theory as a way to cope with the business environment of today. One aspect of decentralization is the case of two profitcenters in an organization trading an intermediate good. In this case there are two major objectives in determining the transfer price: the first objective is to align the interests of local and central management. The second objective is to facilitate a performance evaluation of the manager of the profitcenter. The management accounting literature has proposed a number of different methods of transfer pricing, but has not succeeded in providing a method that achieve both objectives in a general setting, and therefore has not been able to give recommendations of “the” best transfer pricing method. The complexity of determining the transfer price is clarified by reviewing a number of different transfer pricing models, which also provide a set of different explanations of the wide variety of different transfer pricing methods. The staring point is the standard model of Hirshleifer(1956) which is simplified by assuming symmetric information and that the agents decisions only regard the quantity of internal trade. In this setting the optimal transfer price facilitates efficient internal trade. The model has certain limitations. In specific it does not explain the empirical observations and it does not provide a rationale of the proposed organizational structure. To get a better feeling of the complexity of the problem, a number of model extensions are reviewed. First, asymmetric information is introduced and this complicates the problem considerably. Setting the right transfer price not only facilitates efficient trade but also efficient effort by the agents. In this setting the decentralized organization achieves efficiency by cost-plus transfer pricing. Second, the standard model is extended by assuming incomplete contracting. The setting gets complicated because the agents can make a specific and irreversible investment. Efficient level of investment and internal trade can be induced by means of negotiated transfer pricing. Delegation of decision making can thereby eliminate the hold-up problem. Third, the standard model is extended by assuming that the participants in the market can observe each others transfer price prior to determining the price of the final product. With this assumption the transfer price serves as a credible commitment device vis-à-vis the competitor. By delegating decision making and commitment to absorption costing the firm achieves superior profitability. Empirical observations are assessed. It is surprising that marginal costing and variable costing are relatively popular. Otherwise empirical observations seems in line with the theoretical considerations. On the other hand the models seems less successful in giving a rationale for the assumed organizational structure.