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Centralized Pricing Versus Delegating Pricing to the Salesforce Under Information Asymmetry

Author

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  • Birendra K. Mishra

    (Anderson Graduate School of Management, University of California, Riverside, California 92521, and School of Management, The University of Texas at Dallas, Richardson, Texas 75083-0688)

  • Ashutosh Prasad

    (School of Management, The University of Texas at Dallas, Richardson, Texas 75083-0688)

Abstract

The issue of delegating pricing responsibility to the salesforce is of interest to marketing academics and practitioners. It has been shown by Lal (1986) that under certain situations with information asymmetry, it is more profitable for the firm to delegate pricing authority to the salesforce than to have centralized pricing. In this paper we re-examine situations where information asymmetry exists and analyze its effect on the decision of the firm to set a price or delegate pricing responsibility to the salesforce. Using contract theory, we find that when the salesperson's private information can be revealed to the firm through contracting, centralized pricing performs at least as well as price delegation. We derive the optimal centralized pricing contract under a set of standard assumptions used in the economics and business literature.

Suggested Citation

  • Birendra K. Mishra & Ashutosh Prasad, 2004. "Centralized Pricing Versus Delegating Pricing to the Salesforce Under Information Asymmetry," Marketing Science, INFORMS, vol. 23(1), pages 21-27, January.
    • Handle: RePEc:inm:ormksc:v:23:y:2004:i:1:p:21-27
    DOI: 10.1287/mksc.1030.0026
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    References listed on IDEAS

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