Price Delegation or Not? The Effect of Heterogeneous Sales Agents

Abstract

In this study, we examine the effect of the differences in both sales ability and reservation utility on the design of the pricing scheme and compensation contract under asymmetric information. Heterogeneity with ability‐dependent reservation utility generates conflicted screening and pooling effects that preclude separating and pooling equilibria, respectively; with which agents may work harder under either centralized or delegated pricing scheme than if they were homogeneous and, in certain scenarios, no premiums (information rents) are paid. These findings are driven by the dynamics between the differences in agents’ reservation utilities and in their effort costs or rewards that arise when their true types are concealed. We show that optimal separating contracts generate the same profit under centralized and delegated pricing because separating contracts under centralization retain the pricing flexibility of delegation. However, a certain form of pooling contract under delegated pricing can outperform the optimal pooling contract under centralization because the upside of pricing flexibility under delegation dominates the downside caused by reduced effort incentives. Under the optimal contracts, delegated pricing is as profitable to the firm as centralized pricing when the difference of reservation utilities is small or when the difference is large but the ability gap is small, and delegation is preferred when the difference of reservation utilities is moderate or when both the difference and the ability gap are large.