If markets are not perfectly competitive, selling prices affect the quantity of product sold. Consider an auto dealer: In order to sell more new or used cars, the dealer has to reduce the price of the vehicles. A similar situation applies to industries ranging from toilet paper and toothpaste to software. Faced with an imperfectly competitive market, the manager of the selling division will choose a price and quantity combination for the intermediate product that maximizes the division’s operating income. If the transfer price is set at this price, the buying division may find that acquiring the product is too costly and results in a loss and decide not to purchase the product. Yet, from the point of view of the company as a whole, it may well be that profits are maximized if the selling division transfers the product to the buying division for further processing and sale. For this reason, when the market for the intermediate good is imperfectly competitive, the transfer price must generally be set below the external market price (but above the selling division’s variable cost) in order to induce efficient transfers.*