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Delegating Pricing Decisions in Competitive Markets with Symmetric and Asymmetric Information

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  • Birendra K. Mishra

    (Anderson Graduate School of Management, University of California, Riverside, California 92521)

  • Ashutosh Prasad

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

Abstract

Delegating pricing decisions to the salesforce has been a salient issue for marketing academics and practitioners. We examine this issue in a competitive market using standard agency theory with symmetric and asymmetric information. Under symmetric information we find that the optimal contracts have a nice property that allows managers to reach the upper bound on firms’ profit by using either centralized or delegated pricing, and hence there are no incentive-based reasons to prefer centralized versus delegated contract types. Thus, managers can focus on the design of the optimal incentive scheme without worrying about the contract type. Under asymmetric information we find that there always exists an equilibrium where all firms use centralized pricing that is either unique or payoff equivalent to equilibria that have a combination of contract types. These results are robust to a large class of agent and market parameters. However, if restrictions are exogenously imposed on contract form or observability, the above results are no longer true, as in earlier work. We demonstrate our results by providing explicit solutions under the Holmstrom and Milgrom (1987) framework.

Suggested Citation

  • Birendra K. Mishra & Ashutosh Prasad, 2005. "Delegating Pricing Decisions in Competitive Markets with Symmetric and Asymmetric Information," Marketing Science, INFORMS, vol. 24(3), pages 490-497, March.
    • Handle: RePEc:inm:ormksc:v:24:y:2005:i:3:p:490-497
    DOI: 10.1287/mksc.1040.0102
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    Cited by:

    1. Duncan Simester & Juanjuan Zhang, 2014. "Why Do Salespeople Spend So Much Time Lobbying for Low Prices?," Marketing Science, INFORMS, vol. 33(6), pages 796-808, November.
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    3. Raphael Thomadsen & Ki-Eun Rhee, 2007. "Costly Collusion in Differentiated Industries," Marketing Science, INFORMS, vol. 26(5), pages 660-665, 09-10.
    4. Avinadav, Tal & Chernonog, Tatyana & Fruchter, Gila E. & Prasad, Ashutosh, 2020. "Contract design when quality is co-created in a supply chain," European Journal of Operational Research, Elsevier, vol. 286(3), pages 908-918.
    5. Neven, Damien & Piccolo, Salvatore & Andreu, Enrique, 2021. "Price Authority and Information Sharing with Competing Principals," CEPR Discussion Papers 16753, C.E.P.R. Discussion Papers.
    6. Long Gao & Birendra K. Mishra, 2019. "The Role of Market Evolution in Channel Contracting," Management Science, INFORMS, vol. 67(5), pages 2432-2441, May.
    7. Soroush Saghafian & Xiuli Chao, 2014. "The impact of operational decisions on the design of salesforce incentives," Naval Research Logistics (NRL), John Wiley & Sons, vol. 61(4), pages 320-340, June.
    8. Sumitro Banerjee & Alex P. Thevaranjan, 2019. "Targeting and salesforce compensation: When sales spill over to unprofitable customers," Quantitative Marketing and Economics (QME), Springer, vol. 17(1), pages 81-104, March.
    9. Robert Phillips & A. Serdar Şimşek & Garrett van Ryzin, 2015. "The Effectiveness of Field Price Discretion: Empirical Evidence from Auto Lending," Management Science, INFORMS, vol. 61(8), pages 1741-1759, August.
    10. Sumitro Banerjee & Alex P. Thevaranjan, 2013. "How to deal with unprofitable customers? A salesforce compensation perspective," ESMT Research Working Papers ESMT-13-05, ESMT European School of Management and Technology.
    11. Noah Lim & Sung H. Ham, 2014. "Relationship Organization and Price Delegation: An Experimental Study," Management Science, INFORMS, vol. 60(3), pages 586-605, March.
    12. Frenzen, Heiko & Hansen, Ann-Kristin & Krafft, Manfred & Mantrala, Murali K. & Schmidt, Simone, 2010. "Delegation of pricing authority to the sales force: An agency-theoretic perspective of its determinants and impact on performance," International Journal of Research in Marketing, Elsevier, vol. 27(1), pages 58-68.
    13. Lin Hao & Yong Tan, 2019. "Who Wants Consumers to Be Informed? Facilitating Information Disclosure in a Distribution Channel," Service Science, INFORMS, vol. 30(1), pages 34-49, March.
    14. Yan Dong & Yuliang Yao & Tony Haitao Cui, 2011. "When Acquisition Spoils Retention: Direct Selling vs. Delegation Under CRM," Management Science, INFORMS, vol. 57(7), pages 1288-1299, July.
    15. Pranav Jindal & Peter Newberry, 2022. "The Profitability of Revenue-Based Quotas Under Price Negotiation," Management Science, INFORMS, vol. 68(2), pages 917-940, February.
    16. Dai, Yue & Chao, Xiuli, 2016. "Price delegation and salesforce contract design with asymmetric risk aversion coefficient of sales agents," International Journal of Production Economics, Elsevier, vol. 172(C), pages 31-42.
    17. Tran, Thanh & Desiraju, Ramarao, 2017. "Group-buying and channel coordination under asymmetric information," European Journal of Operational Research, Elsevier, vol. 256(1), pages 68-75.
    18. Cron, William L. & Gilly, Mary C. & Graham, John L. & Slocum Jr., John W., 2009. "Gender differences in the pricing of professional services: Implications for income and customer relationships," Organizational Behavior and Human Decision Processes, Elsevier, vol. 109(1), pages 93-105, May.
    19. Özalp Özer & Upender Subramanian & Yu Wang, 2018. "Information Sharing, Advice Provision, or Delegation: What Leads to Higher Trust and Trustworthiness?," Management Science, INFORMS, vol. 64(1), pages 474-493, January.
    20. Jian Chen & He Huang & Liming Liu & Hongyan Xu, 2021. "Price Delegation or Not? The Effect of Heterogeneous Sales Agents," Production and Operations Management, Production and Operations Management Society, vol. 30(5), pages 1350-1364, May.
    21. Sandro Shelegia & Joshua Sherman, 2022. "Bargaining at Retail Stores: Evidence from Vienna," Management Science, INFORMS, vol. 68(1), pages 27-36, January.
    22. Matthias Kräkel & Anja Schöttner, 2020. "Delegating Pricing Authority to Sales Agents: The Impact of Kickbacks," Management Science, INFORMS, vol. 66(6), pages 2686-2705, June.
    23. Long Gao, 2023. "Optimal Incentives for Salespeople with Learning Potential," Management Science, INFORMS, vol. 69(6), pages 3285-3296, June.
    24. Bharadwaj Kadiyala & Robert Phillips & A. Serdar Şimşek & Garrett van Ryzin, 2023. "Predicting transaction outcomes under customized pricing with discretion: A structural estimation approach," Production and Operations Management, Production and Operations Management Society, vol. 32(6), pages 1654-1673, June.

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