Cost-based transfer pricing with the existence of a direct channel in an integrated supply chain

Purpose This study aims to analytically explore the economic role of transfer pricing in a vertically integrated supply chain with direct channel, specifically when it uses cost-based prices, as is frequently observed management practices. We compare two representative methods: full-cost and variable-cost pricing. Although many firms open which affects optimal decision on prior literature has not considered this case. Design/methodology/approach demonstrate results using non-cooperative game theoretical approach. Findings The show that more profitable than fixed cost allocation marketing division low, contrary established position studies, from I select their benchmark Moreover, we obtain counterintuitive result, whereby, firm-wide profit increases allocation. Originality/value considers channel internal chain, while research only one or other. model suggests an choice managerial decisions. In addition, authors positive effect increasing allocation, studies do show. findings have implications for practice by providing insights into design showing should consider competition between channels making decisions about methods.