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

Alonso, Ricardo and Dessein, Wouter and Matouschek, Niko (2008) Centralization versus decentralization: an application to price setting by a multi-market firm. Journal of the European Economic Association, 6 (2-3). pp. 457-467. ISSN 1542-4766

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Identification Number: 10.1162/JEEA.2008.6.2-3.457

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.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/journal/10.1111/%28...
Additional Information: © 2008 European Economic Association
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
JEL classification: D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L23 - Organization of Production
Sets: Departments > Management
Date Deposited: 05 Aug 2014 13:36
Last Modified: 05 Aug 2014 13:36
URI: http://eprints.lse.ac.uk/id/eprint/58662

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