Internal Markets for Supply Chain Capacity Allocation
Abstract
explores the possibility of solving supply chain capacity allocation problems using
internal markets among employees of the same company. Unlike earlier forms of transfer
pricing, IT now makes it easier for such markets to involve many employees, finegrained
transactions, and frequently varying prices. The paper develops a formal model of
such markets, proves their optimality in a baseline condition, and then analyzes various
potential market problems and solutions. Interestingly, these proposed solutions are
not possible in a conventional market because they rely on the firm's ability to pay
market participants based on factors other than just the profitability of their market
transactions. For example, internal monopolies can be ameliorated by paying internal
monopolists on the basis of corporate, not individual, profits. Incentives for collusion
among peers can be reduced by paying participants based on their profits relative
to peers. Profit-reducing competition among different sales channels can be reduced
by imposing an internal sales tax. And problems caused by fixed costs can be avoided
by combining conditional internal markets with a pivot mechanism.
Type
Journal articlePermalink
https://hdl.handle.net/10161/2027Collections
More Info
Show full item recordScholars@Duke
David McAdams
Professor of Business Administration
David McAdams is Professor of Business Administration at the Fuqua School of Business,
Duke University. He is also Professor of Economics in the Economics Department at
Duke. He earned a B.S. in Applied Mathematics at Harvard University, an M.S. in Statistics
from Stanford University, and a Ph.D. in Business from the Stanford Graduate School
of Business. Before joining the faculty at Duke, he was Associate Professor of Applied
Economics at the MIT Sloan School of Management. He has also worked a

Articles written by Duke faculty are made available through the campus open access policy. For more information see: Duke Open Access Policy
Rights for Collection: Scholarly Articles
Works are deposited here by their authors, and represent their research and opinions, not that of Duke University. Some materials and descriptions may include offensive content. More info