Who Should Set the Prices? Analysis of Pricing Decentralization in Customized Pricing Systems
Seminar by A. Serdar Şimşek Cornell University
In many markets, it is common for headquarters to create a price list but grant local salespeople discretion to negotiate prices for individual transactions. How much (if any) pricing discretion headquarters should grant is a topic of debate within many firms. We investigate this issue using a unique data set from an indirect lender with local pricing discretion. We estimate that the local sales force adjusted prices in a way that improved profits by approximately 11% on average. A counterfactual analysis shows that using a centralized, data-driven pricing optimization system could improve profits even further, up to 20% over those actually realized. This suggests that centralized pricing –if appropriately optimized– can be more effective than field price discretion. We then propose and analyze a structural estimation method based on the expectation-maximization algorithm that allows for the customer’s willingness-to-pay and sales agent’s reserve price distributions to depend on an arbitrary set of covariates. Our estimation method generates accurate estimates of customer-price response and the prices of lost deals. The estimated distributions can also be used to optimize controls on negotiated prices that can significantly increase revenues relative to both unconstrained negotiations and centrally-optimized fixed prices. This is joint work with Robert Phillips and Garrett van Ryzin from Columbia University.
