Delegating Pricing Decisions in Competitive Markets with Symmetric and Asymmetric Information

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.