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

Ricardo Alonso, Wouter Dessein and Niko Matouschek

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

JEL-codes: D23 D83 L23 (search for similar items in EconPapers)
Date: 2008-05
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Citations: View citations in EconPapers (12)

Published in Journal of the European Economic Association, May, 2008, 6(2-3), pp. 457-467. ISSN: 1542-4766

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http://eprints.lse.ac.uk/58662/ Open access version. (application/pdf)

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Journal Article: Centralization versus Decentralization: An Application to Price Setting by a Multi-market Firm (2008)
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