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An important decision facing sales managers today is precisely how much pricing authority should be delegated to the sales force. Received theory suggests that the salesperson's superior information about customers' valuations will invariably make price delegation profitable for the firm. The empirical 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 examines the optimality of delegating pricing authority to the sales force. The model preserves the notion of superior information assumed in the literature but considers as well a negative feature of much concern to practitioners, namely, the suboptimal substitution of selling effort by price discounting. The model reveals that providing the salesperson with full pricing authority is not always optimal. Specifically, in some environments, it is appropriate to limit pricing authority because this decision forces the salesperson to target high-valuation customers. In addition, the model predicts that the commission rate offered to the salesperson should be higher when pricing authority is fimited. The author concludes by summarizing the context, calculus, and implications of the model with a view to assisting managers charged with the price-delegatiori decision.

Our primary objective in this paper is to analyze a framework that simultaneously examines the role of monitoring and incentives in the design of sales force control systems. Previous research has focused exclusively on the role of incentives in directing salesforce effort. We build on the structure provided by the past work and analyze an agency-thoeretic model in which a salesperson generates wealth for the firm by expending effort across two dimensions, namely, internal and external. We assume that effort in the internal dimension can be monitored relatively cheaply whereas effort in the external dimension can be monitored only at infinite cost. We then analyze the following two scenarios: (i) a pure incentives world wherein both effort dimensions are governed through the use of incentive pay, and (ii) a monitoring and incentives world wherein the internal dimension is monitored and the external dimension is governed through the use of incentive pay. In addition to modeling the notion of partial monitoring in this manner, we also explicitly allow the firm to choose the level of risk aversion desired in its salesperson. Of course, salespeople who are relatively risk-tolerant command higher reservation wages; consequently, such salespeople are likely to be valuable only to those firms that emphasize incentive pay in their control systems. Our analysis across the two scenarios helps us to demonstrate the implications and value of introducing monitoring into the control structure. Specifically, we find that monitoring allows the firm to decrease the weight placed on incentives and hire a relatively risk-averse salesperson from the salesforce labor market. These actions, in turn, permit the firm to reduce the risk premium and the reservation wage offered to the salesperson. In direct contrast to these monetary savings, however, we find that an adverse side effect of monitoring is that it induces salespeople to overemphasize the effort devoted to the monitored dimension while underemphasizing the effort devoted to the nonmonitored dimension. This adverse effect of monitoring notwithstanding, we find that the overall benefit of increased monitoring is that it allows the firm to the amount of total compensation paid to the salesperson. These analytical findings are consistent with the prescriptions found in the popular business press where it is often stated that compensation plans that emphasize incentive pay are characterized by independence in managing activities (lack of monitoring) as well as high income potential. These findings are also consistent with the popular wisdom that incentive-laden compensation plans are generally more appropriate for individuals who are risk takers and entrepreneurial in nature. We also delineate the conditions where monitoring can improve on the profits obtained in a pure incentives world. Specifically, we find that monitoring can prove to be most valuable when the importance of internal activities is high and the level of incentives is low. Finally, we conclude by conducting a sens...

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P robabilistic selling-the sale of synthetic products consisting of a lottery between two distinct goods-has been extensively analyzed in horizontal markets. In this research, we investigate probabilistic selling in quality-differentiated markets. This is an important new dimension of inquiry because of the widespread prevalence of quality-differentiated markets as well as significant differences in the preference structure across these markets. In fact, this latter consideration casts doubt as to whether probabilistic selling will even emerge in quality-differentiated markets. We find that probabilistic selling emerges in quality-differentiated markets as a way to profitably dispose excess capacity; moreover, probabilistic selling remains viable even under endogenous quality choice. In addition, in markets where sellers employ "strong" quality differentiation, the introduction of an intermediate probabilistic good actually causes closer quality levels in a product line and enhances consumer welfare. In contrast, in markets where sellers employ "weak" quality differentiation, the introduction of an intermediate probabilistic good increases quality separation and degrades consumer welfare. Overall, we view our contribution as one of characterizing the optimality, implementation, and policy implications of probabilistic selling in quality-differentiated markets.