Price strategies and salesforce compensation design with overconfident sales agent

Abstract

Salesforce compensation and pricing decisions have invoked the interest of several academicians and practitioners for a long period of time. However, dilemma of whether the pricing decisions should be made by the firm or delegated to the sales agent, especially the overconfident agent, is still unexplored. This study tries to investigate the problems associated with this dilemma by conducting a thorough study of the scenario, it studies a supply chain that the rational manufacturer hiring an overconfident sales agent to sell its products, the agent might overestimate the demand, or underestimate the variability of the demand. These behaviors are characterized as ability-based and precision-based overconfidence respectively. The models are designed for centralized pricing and delegated pricing settings, and the sensitivity analysis are conducted. Moreover, comparative studies have also been conducted to highlight the impacts of the two types of overconfidence on the compensation decisions under different pricing strategies. It was found out that, the manufacturer favors centralized pricing, while the sales agent prefers delegated pricing. The final decisions of both sides deviate considerably from the rational scenario, overconfidence prompts the agent to exert more efforts, which ultimately enhances manufacturer’s profits that the manufacturer should hire a more overconfident agent, while not guaranteeing a higher commission rate. Overconfidence leads to the decline of the agent’s actual utility, and the loss amount increases with the overconfidence level. The influences of the both types of overconfidence are substitutable. Managerial insights are also provided for various scenarios and propositions along with numerical illustration of the finding.