Delegating Pricing Authority to the Sales Force: Why Less May Be More

Economists have long understood the importance of co-locating decision authority with the knowledge that is valuable to those decisions. Following this prescription, marketing scholars have developed strong theoretical arguments in favor of delegating pricing authority to the sales force. Empirical work, however, reveals a significant number of sales organizations yielding only minimal authority to their salespeople. Moreover, firms that grant pricing authority to their sales force generate a lower level of profits than those that limit pricing authority. Given this divergence between theory and practice, we present two reasons that could potentially mitigate the optimality of delegating pricing authority to the sales force. First, we hypothesize that limiting pricing authority may be attractive to the firm because it eliminates a specific type of agency cost, namely, the sub-optimal substitution of selling effort by price discounting. Second, we posit that pricing authority is often curtailed because such freedom may be incompatible with a control system that is designed to optimize several other considerations. We test our hypotheses on a sample of 222 German sales organizations and find that the data are consistent with our expectations. Overall, these findings advance the literature by suggesting a contingent approach with respect to the pricedelegation decision.