Pricing and capacity allocation in multi-national firms with product substitution, tax and exchange rate externalities

This study investigates the optimal capacity allocation and pricing problem of a multi-national firm that distributes and sells its product across international markets through its subsidiaries. The demand for the product in each market is seasonal and a function of the selling price. Demand in each market is inversely related to the price which is expressed in the currency of the country where the market is located. The basic issue analyzed in this dissertation is the problem of an integrated global supply chain where a home-country supplier/manufacturer must decide how to allocate his limited capacity of products that are substitutable to its subsidiaries located in different countries with different exchange rates and with price dependent demands. We also investigate the impact of product substitution on prices, quantities for allocation and on expected profits. The objective is to maximize the expected profits of the global firm before taxes and after taxes. In the later case, we incorporate in the analysis taxes and import duties as parameters and transfer prices as decision variables. The main questions addressed in this thesis are the following: (1) What is the impact of substitution between products on the profit of the integrated international firm? (2) What is the impact of the degrees of substitution between products and of the price induced demands on selling prices, on transfer prices, and on quantities allocated to the distributors in international locations? (3) What is the impact of changes in values of given parameters, such as capacity constraints, exchange rates, manufacturing times and costs, taxes and import duties on the optimal results?;The analyses, the results and the managerial insights are presented and discussed.