Centralized Pricing versus Delegating Pricing to the Salesforce under Information Asymmetry

The issue of delegating pricing responsibility to the salesforce is of interest to marketing academics and practitioners. It has been shown by Lal (1986) that under certain situations with information asymmetry, it is more profitable for the firm to delegate pricing authority to the salesforce than to have centralized pricing. In this paper we re-examine situations where information asymmetry exists and analyze its effect on the decision of the firm to set a price or delegate pricing responsibility to the salesforce. Using contract theory, we find that when the salesperson's private information can be revealed to the firm through contracting, centralized pricing performs at least as well as price delegation. We derive the optimal centralized pricing contract under a set of standard assumptions used in the economics and business literature.