Centralization versus Decentralization: An Application to Price Setting by a Multi-Market Firm
Coauthor(s): Ricardo Alonso, Niko Matouschek.
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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.
Source: Journal of the European Economic Association
Alonso, Ricardo, Wouter Dessein, and Niko Matouschek. "Centralization versus Decentralization: An Application to Price Setting by a Multi-Market Firm." Journal of the European Economic Association 6, no. 2-3 (2008): 457-467.