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 10% on average. A counterfactual analysis shows that using a centralized, data-driven pricing optimization system could improve profits even further, up to 27% 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.

Citation

Phillips, Robert, Serdar Simsek, and Garrett van Ryzin. "Does Field Price Discretion Improve Profits? Evidence from Auto Lending." Columbia Business School, 2014.

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