Transfer pricing has typically been analysed within the context of monopoly markets, showing the power of transfer pricing to raise profits. This paper takes a new perspective in introducing competition in the host market of the multinational firm. It analyses how strategic interaction affects the behaviour of an MNF under different tax and tariff rates. Furthermore, the paper examines how the ability of the MNF to manipulate the transfer price affects the activities and competitive position of the host firm which does not operate internationally. The results indicate that the type of strategic interaction and the transfer price level play an important role in explaining the differences in the corresponding optimization results of the monopoly and strategic interaction models. These differences in results suggest major implications for the effectiveness of tax and tariff policies measured in terms of their effects on consumer surplus, government revenues, the level of employment, and the balances of payments of the home and the host country.