Price Authority under Competing Organizations

33 Pages Posted: 11 Oct 2021

See all articles by Enrique Andreu

Enrique Andreu

affiliation not provided to SSRN

Damien J Neven

Graduate Institute of International and Development Studies (IHEID)

Salvatore Piccolo

University of Bergamo, Compass Lexecon and CSEF

Roberto Venturini

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management

Date Written: October 10, 2021

Abstract

This paper characterizes the degree of price discretion that competing organizations (principals) award to their sales managers (agents) and examines how such discretion is affected by principals' competitive conduct, market concentration, product substitutability, and demand volatility. We lay down a model in which firms sell differentiated products and sales managers own private information about demand and incur positive marketing costs to sell products to final consumers. Principals cannot internalize these costs through monetary incentives and need to design `permission sets' from which their representatives choose prices. The objective is to understand the forces shaping this set and the constraints (if any) imposed on equilibrium prices. We find that when principals behave non-cooperatively, sales managers are biased towards excessively high prices owing to their will to pass on marketing costs to consumers. Hence, in equilibrium, the permission set requires a list price that caps agents' pricing choices. Such list price is more likely to bind in less concentrated industries, when products are closer substitutes, in industries where distribution requires sufficiently high costs and demand is not too volatile. Instead, when principals behave cooperatively and maximize industry profit, the optimal delegation scheme is more complex. Because principals want to raise prices to the monopoly level, in this regime, the optimal permission features a price floor rather than a list price when the marketing cost is sufficiently low, it features instead full discretion for moderate values of this cost, and only when it is sufficiently high, a list price is optimal. Interestingly, while competition hinders delegation in the noncooperative regime, the opposite happens when principals maximize industry profit.

Keywords: Competing Principals, Delegates Sales, Price Discretion, Partial Delegation

JEL Classification: L42, L50, L81.

Suggested Citation

Andreu, Enrique and Neven, Damien J and Piccolo, Salvatore and Venturini, Roberto, Price Authority under Competing Organizations (October 10, 2021). Available at SSRN: https://ssrn.com/abstract=3939736 or http://dx.doi.org/10.2139/ssrn.3939736

Enrique Andreu

affiliation not provided to SSRN

Damien J Neven

Graduate Institute of International and Development Studies (IHEID) ( email )

PO Box 136
Geneva, CH-1211
Switzerland
+41229084578 (Phone)

Salvatore Piccolo (Contact Author)

University of Bergamo, Compass Lexecon and CSEF ( email )

via de caniana 2
24127
Bergamo, BG 24127
Italy

Roberto Venturini

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium

Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management ( email )

19 Av Franklin Roosevelt
1050
Brussels
Belgium

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