Centralization versus decentralization: An application to price setting by a multi-market firm

Ricardo Alonso*, Wouter Dessein, Niko Matouschek

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

10 Scopus citations

Abstract

This paper compares centralized and decentralized price setting by a firm that sells a single product in two markets, but is constrained to set one price (e.g., due to arbitrage). Each market is characterized by a different linear demand function, and demand conditions are privately observed by a local manager. This manager only cares about profits in his own market and, as a result, communicates his information strategically. Our main results link organizational design to market demand. First, if pricing is decentralized, it is always delegated to the manager who faces the flattest inverse demand function, regardless of the size of market demand. Second, even when pricing can be allocated to an unbiased headquarters, decentralization is optimal when markets differ sufficiently in how flat the inverse demand functions are. Finally, decentralization is more likely when, in expectations, local managers disagree more about prices.

Original languageEnglish (US)
Pages (from-to)457-467
Number of pages11
JournalJournal of the European Economic Association
Volume6
Issue number2-3
DOIs
StatePublished - Apr 2008

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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