Abstract
Transfer prices are an effective strategy for improving theafter-tax profits of global supply chains with differential taxrates. Rigorous evidence of their effectiveness has beenestablished by many researchers for deterministic settings. Tothe best of our knowledge, there has been no research studying theimpact of transfer prices in stochastic supply chain settings.We attempt to fill this void by studying a two-stage supply chainin which the end-customer demand is random. This forces theretailer to behave like a newsvendor and balance overage costswith underage costs. Using a combination of analytical andcomputational techniques, we show that randomness in a supplychain magnifies the impact of transfer prices. We analyze possiblereasons behind this behavior and also summarize the impact ofvarious supply chain parameters (customer base, price elasticity,overage and underage costs, etc.) on the magnitude of profitimprovement.
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