Watching the Whole Doughnut

T. M. Whitin
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T. M. Whitin: Department of Economics, Wesleyan University, Middletown, Connecticut 06457

Interfaces, 1981, vol. 11, issue 4, 80-83

Abstract: In a recent article in this journal, B. A. Pasternack [1980] explored the effects of varying the pricing structure so that individual store managers in a highly decentralized chain would make decisions which “more closely paralleled the objectives of the firm.” Using the same type of payment assumed by the author, it is simple to provide the store managers with a pricing structure which makes their objectives precisely equal to those of the firm.Several of Pasternack's conclusions are shown to be wrong or misleading when viewed in the context of the more general model presented here. In addition, simpler formulas for computation of expected profits are developed, which make possible a brief exploration of the sensitivity of the model's profits to variations in the price of donuts. This indicates that the determination of the optimal price may be of more importance than the problem of setting appropriate incentives for the decentralized manager.

Keywords: inventory/production: policies; pricing (search for similar items in EconPapers)
Date: 1981
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