On the optimality of delegating pricing authority to the sales force

An important decision facing sales managers today is precisely how much pri cing authority should be delegated to the sales force. Received theory sugg ests that the salesperson's superior information about customers' valuation s will invariably make price delegation profitable for the firm. The empiri cal evidence, however, reveals that firms that grant full pricing authority generate lower profits than firms that limit pricing authority. Given this state of affairs, the author develops and analyzes a formal model that exa mines the optimality of delegating pricing authority to the sales force. Th e model preserves the notion of superior information assumed in the literat ure but considers as well a negative feature of much concern to practitione rs, namely the suboptimal substitution of selling effort by price discounti ng. The model reveals that providing the salesperson with full pricing auth ority is not always optimal. Specifically in some environments, it is appro priate to limit pricing authority because this decision forces the salesper son to target high-valuation customers. In addition, the model predicts tha t the commission rate offered to the salesperson should be higher when pric ing authority is limited. The author concludes by summarizing the context, calculus, and implications of the model with a view to assisting managers c harged with the price-delegation decision.