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The Effectiveness of Field Price Discretion: Empirical Evidence from Auto Lending

Author

Listed:
  • Robert Phillips

    (Columbia Business School, New York, New York 10027; and Nomis Solutions, San Bruno, California 94066)

  • A. Serdar Şimşek

    (School of Operations Research and Information Engineering, Cornell University, Ithaca, New York 14853)

  • Garrett van Ryzin

    (Columbia Business School, New York, New York 10027)

Abstract

In many markets, it is common for headquarters to create a price list but grant local salespeople discretion to negotiate prices for individual transactions. How much (if any) pricing discretion headquarters should grant is a topic of debate within many firms. We investigate this issue using a unique data set from an indirect lender with local pricing discretion. We estimate that the local sales force adjusted prices in a way that improved profits by approximately 11% on average. A counterfactual analysis shows that using a centralized, data-driven pricing optimization system could improve profits even further, up to 20% over those actually realized. This suggests that centralized pricing—if appropriately optimized—can be more effective than field price discretion. We discuss the implications of these findings for auto lending and other industries with similar pricing processes. This paper was accepted by Serguei Netessine, operations management .

Suggested Citation

  • 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.
    • Handle: RePEc:inm:ormnsc:v:61:y:2015:i:8:p:1741-1759
    DOI: 10.1287/mnsc.2014.2084
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    References listed on IDEAS

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