The Effectiveness of Field Price Discretion: Empirical Evidence from Auto Lending

Robert Phillips (), A. Serdar Şimşek () and Garrett van Ryzin ()
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Robert Phillips: Columbia Business School, New York, New York 10027; and Nomis Solutions, San Bruno, California 94066
A. Serdar Şimşek: School of Operations Research and Information Engineering, Cornell University, Ithaca, New York 14853
Garrett van Ryzin: Columbia Business School, New York, New York 10027

Management Science, 2015, vol. 61, issue 8, 1741-1759

Abstract: In many markets, it is common for headquarters to create a price list but grant local salespeople discretion to negotiate prices for individual transactions. How much (if any) pricing discretion headquarters should grant is a topic of debate within many firms. We investigate this issue using a unique data set from an indirect lender with local pricing discretion. We estimate that the local sales force adjusted prices in a way that improved profits by approximately 11% on average. A counterfactual analysis shows that using a centralized, data-driven pricing optimization system could improve profits even further, up to 20% over those actually realized. This suggests that centralized pricing—if appropriately optimized—can be more effective than field price discretion. We discuss the implications of these findings for auto lending and other industries with similar pricing processes. This paper was accepted by Serguei Netessine, operations management .

Keywords: customized pricing; sales force price discretion; price sensitivity estimation; endogeneity; consumer lending (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (24)

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