Relationship Organization and Price Delegation: An Experimental Study

Abstract

P rice delegation to the salesforce is a practice widely adopted by firms. This paper examines the relationship between price delegation and managerial profits using a laboratory economics experiment. A novel feature of our experiment is that we study how varying the relationship organization of the sales manager and salesperson to allow for (1) requests by the salesperson for the manager to choose price delegation, and for (2) the manager to award a small bonus after observing the salesperson's decisions, can affect behavior. The results show that, contrary to the theoretical prediction, managers choose price delegation frequently and salespeople respond reciprocally, leading to higher manager profits under price delegation. Moreover, this behavior increases when requests and bonuses are allowed. We show that a behavioral economics model that incorporates positive reciprocity can explain these results well.Data, as supplemental material, are available at http://dx.

When Do Group Incentives for Salespeople Work?

“…Second, given the mathematical complexity of the decision tasks, effort levels could also be partially driven by decision errors, as indicated by the variation in the data. We believe that models that incorporate decision errors in a quantal-response equilibrium framework (e.g., Lim and Ham 2013; Parco, Rapoport, and Amaldoss 2005) can fit the data better; however, given the pattern of effort decisions across the social and informational conditions, they do so only in conjunction with a utility function that accounts for nonpecuniary incentives.…”

“…To explain the empirical findings from our experiments, we extend marketing theory by developing a more general model of salesperson behavior under a group incentive. Our behavioral economics model explicitly accounts for the possibility that salespeople can be motivated by social preferences (Amaldoss and Jain 2005;Cui, Raju, and Zhang 2007;Lim 2010). 4 We assume that when the social ties between group members are stronger, salespeople care more about their teammate's pay.…”

Indirect Higher Order Beliefs and Cooperation

“…This feature contrasts with experimental studies that employ "backward directed" communication (e.g. Charness and Dufwenberg (2006, 2011), Lim and Ham (2014), in which messages are sent by a player to the one who moves before him (e.g., the sender can indicate to the player who moves before him that he will take a certain action). One advantage of using "forward directed" communication is that explanations such as belief-independent lying aversion (see Gneezy (2005) and Vanberg (2008)) by Player C do not apply to our context.…”

The role of leadership in salespeople’s price negotiation behavior

“…Approximately 70% of companies delegate some extent of pricing authority to their salesforce (Lim and Ham 2014;Hansen, Joseph, and Krafft 2008;Frenzen et al 2010). Seeing this influence of salespeople on their companies' price setting, managers are often concerned with ensuring their salespeople's price defense behaviors (Joseph 2001).…”