Centralization versus Decentralization: An Application to Price Setting by a Multi-market Firm
This paper compares centralized and decentralized price setting by a firm that sells a single product in two markets, but is constrained to set one price (e.g., due to arbitrage). Each market is characterized by a different linear demand function, and demand conditions are privately observed by a local manager. This manager only cares about profits in his own market and, as a result, communicates his information strategically. Our main results link organizational design to market demand. First, if pricing is decentralized, it is always delegated to the manager who faces the flattest inverse demand function, regardless of the size of market demand. Second, even when pricing can be allocated to an unbiased headquarters, decentralization is optimal when markets differ sufficiently in how flat the inverse demand functions are. Finally, decentralization is more likely when, in expectations, local managers disagree more about prices. (JEL: D23, D83, L23) (c) 2008 by the European Economic Association.
Volume (Year): 6 (2008)
Issue (Month): 2-3 (04-05)
|Contact details of provider:|| Web page: http://www.mitpressjournals.org/jeea|
|Order Information:||Web: http://www.mitpressjournals.org/jeea|
When requesting a correction, please mention this item's handle: RePEc:tpr:jeurec:v:6:y:2008:i:2-3:p:457-467. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kristin Waites)
If references are entirely missing, you can add them using this form.