IDEAS home Printed from https://ideas.repec.org/a/inm/ormksc/v20y2001i2p143-169.html
   My bibliography  Save this article

Delegating Pricing Decisions

Author

Listed:
  • Pradeep Bhardwaj

    (Anderson School at UCLA, Los Angeles, California, 90095-1481)

Abstract

An outstanding problem in marketing is why some firms in a competitive market delegate pricing decisions to agents and other firms do not. This paper analyzes the impact of competition on the delegation decision and, in turn, the impact of delegation on prices and incentives. The theory builds on the simplest framework of competition in two dimensions: prices and (sales agents') effort. Specifically, we are interested in answering the following questions: (1) Does competition affect the price-delegation decision and, if yes, why? (2) How do prices vary under price-delegation and no-price-delegation scenarios? (3) Do the incentives to the sales representatives vary under the delegation and no-delegation scenarios? To address these issues, we build a game-theoretic model that consists of two firms selling through their sales representatives. These representatives are company employees. Sales are a function of prices and selling efforts. The risk-neutral firms decide whether or not to delegate the pricing decision to risk-averse sales representatives. The wages to the sales representatives consist of salary plus a commission on gross margins. The commission on gross margins can be adjusted, either through communicated marginal cost of production, which we call “virtual” marginal cost, or directly. The firm and the sales representative are assumed to have the same information about the market, that is, there is no information asymmetry. With competition in two dimensions, the strategic nature of decision variable depends on the relative intensity of competition. With unobservable contracts and risk-averse sales representatives, firms delegate the pricing decision when price competition is intense. Part of the uncertainty in demand is absorbed by the firm by keeping “virtual” marginal cost greater than the marginal cost of production. The competing firm infers this through the risk aversion of the sales representatives. Under price delegation the sales representatives' wages are higher, and they set a price that is higher than what the firms would have set themselves. This leads to softening of price competition that is to the advantage of both firms. When the effort competition is dominant, however, the firms prefer to make the pricing decision themselves, because this reduces the intensity of effort competition among agents. A single-instrument commission structure in which the firms adjust the “virtual” marginal cost is compared to a two-instrument commission structure in which the firms can adjust the commission rate, as well the “virtual” marginal cost. Under no price delegation, the two incentive schemes are the same. However, under price delegation the risk premium with the two-instrument scheme is lower. However, the prices and efforts are higher with the single-instrument scheme. When price competition is intense, the increase in risk premium with the single instrument scheme is more than compensated for by the increase in profits. This is the benefit of softening price competition through higher prices.

Suggested Citation

  • Pradeep Bhardwaj, 2001. "Delegating Pricing Decisions," Marketing Science, INFORMS, vol. 20(2), pages 143-169, September.
    • Handle: RePEc:inm:ormksc:v:20:y:2001:i:2:p:143-169
    DOI: 10.1287/mksc.20.2.143.10190
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mksc.20.2.143.10190
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mksc.20.2.143.10190?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Rajiv Lal & Richard Staelin, 1986. "Salesforce Compensation Plans in Environments with Asymmetric Information," Marketing Science, INFORMS, vol. 5(3), pages 179-198.
    2. S. Chan Choi, 1991. "Price Competition in a Channel Structure with a Common Retailer," Marketing Science, INFORMS, vol. 10(4), pages 271-296.
    3. Katz, Michael L., 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," Department of Economics, Working Paper Series qt79b870w0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    4. Charles B. Weinberg, 1975. "An Optimal Commission Plan for Salesmen's Control Over Price," Management Science, INFORMS, vol. 21(8), pages 937-943, April.
    5. Michael L. Katz, 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 307-328, Autumn.
    6. K. Sridhar Moorthy, 1988. "Strategic Decentralization in Channels," Marketing Science, INFORMS, vol. 7(4), pages 335-355.
    7. Amiya K. Basu & Rajiv Lal & V. Srinivasan & Richard Staelin, 1985. "Salesforce Compensation Plans: An Agency Theoretic Perspective," Marketing Science, INFORMS, vol. 4(4), pages 267-291.
    8. Timothy W. McGuire & Richard Staelin, 1983. "An Industry Equilibrium Analysis of Downstream Vertical Integration," Marketing Science, INFORMS, vol. 2(2), pages 161-191.
    9. Rajiv Lal, 1986. "Technical Note—Delegating Pricing Responsibility to the Salesforce," Marketing Science, INFORMS, vol. 5(2), pages 159-168.
    10. G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 27-38, Spring.
    11. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    12. Ram C. Rao, 1990. "Compensating Heterogeneous Salesforces: Some Explicit Solutions," Marketing Science, INFORMS, vol. 9(4), pages 319-341.
    13. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    14. Anne T. Coughlan, 1985. "Competition and Cooperation in Marketing Channel Choice: Theory and Application," Marketing Science, INFORMS, vol. 4(2), pages 110-129.
    15. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    16. Steven D. Sklivas, 1987. "The Strategic Choice of Managerial Incentives," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 452-458, Autumn.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Irmen, Andreas, 1998. "Precommitment in Competing Vertical Chains," Journal of Economic Surveys, Wiley Blackwell, vol. 12(4), pages 333-359, September.
    2. Markus Reisinger & Tim Paul Thomes, 2017. "Manufacturer collusion: Strategic implications of the channel structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(4), pages 923-954, December.
    3. Govert Vroom, 2006. "Organizational Design and the Intensity of Rivalry," Management Science, INFORMS, vol. 52(11), pages 1689-1702, November.
    4. Esther Gal‐Or, 1997. "Multiprincipal Agency Relationships as Implied by Product Market Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 235-256, June.
    5. 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.
    6. Sridhar Balasubramanian & Pradeep Bhardwaj, 2004. "When Not All Conflict Is Bad: Manufacturing-Marketing Conflict and Strategic Incentive Design," Management Science, INFORMS, vol. 50(4), pages 489-502, April.
    7. Gabrielsen, Tommy Staahl & Roth, Stefan, 2009. "Delegated bargaining in distribution channels," Australasian marketing journal, Elsevier, vol. 17(3), pages 133-141.
    8. Bloomfield, Matthew J., 2021. "Compensation disclosures and strategic commitment: Evidence from revenue-based pay," Journal of Financial Economics, Elsevier, vol. 141(2), pages 620-643.
    9. Salvatore Piccolo & Markus Reisinger, 2011. "Exclusive Territories and Manufacturers' Collusion," Management Science, INFORMS, vol. 57(7), pages 1250-1266, July.
    10. Fabio Caldieraro & Anne T. Coughlan, 2007. "Spiffed-Up Channels: The Role of Spiffs in Hierarchical Selling Organizations," Marketing Science, INFORMS, vol. 26(1), pages 31-51, 01-02.
    11. Baik, Kyung Hwan & Kim, In-Gyu, 1997. "Delegation in contests," European Journal of Political Economy, Elsevier, vol. 13(2), pages 281-298, May.
    12. de Bijl, P.W.J., 1995. "Strategic delegation of responsibility in competing firms," Discussion Paper 1995-33, Tilburg University, Center for Economic Research.
    13. Guttorm Schjelderup & Lars Sorgard, 1997. "Transfer Pricing as a Strategic Device for Decentralized Multinationals," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 4(3), pages 277-290, July.
    14. Gabrielsen, Tommy Staahl, 1997. "Equilibrium retail distribution systems," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 105-120, November.
    15. Robert F. Göx, 1998. "Pretiale Lenkung als Instrument der Wettbewerbsstrategie," Schmalenbach Journal of Business Research, Springer, vol. 50(3), pages 260-288, March.
    16. Thomas A., Gresik & Schjelderup, Guttorm, 2022. "Tax induced transfer pricing under universal adoption of the destination-based cash-flow tax," Discussion Papers 2022/8, Norwegian School of Economics, Department of Business and Management Science.
    17. Fiocco, Raffaele, 2016. "The strategic value of partial vertical integration," European Economic Review, Elsevier, vol. 89(C), pages 284-302.
    18. 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.
    19. Kai-Uwe Kuhn, 1997. "Nonlinear Pricing in Vertically Related Duopolies," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 37-62, Spring.
    20. Thomas A. Gresik & Guttorm Schjelderup, 2024. "Transfer pricing under global adoption of destination-based cash-flow taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(1), pages 243-261, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:20:y:2001:i:2:p:143-169. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.