Dynamic pricing and compensation on heterogeneous sales forces

Abstract

In this paper, we analyze the pricing decision and the compensation strategy of a firm that relies on a heterogeneous sales force to sell its product in two periods. The sales agents’ selling abilities are their private information and will determine the effectiveness of the agents’ selling efforts. We introduce three compensation contract strategies, i.e. pooling, semi-separating and separating that the firm can adopt in period one and by applying principle-agent theory, derive the optimal compensation contracts and optimal price for the firm in two periods in each strategy. Comparing these three contract strategies, we found that the optimal strategy for the firm depends on the discount factor. We show that the firm will surely offer separating contracts in period one for some small discount factor, and for some large discount factor pooling contract is certain to be provided in period one. However, semi-separating contracts may be considered for some mediate discount factor, and also may not appear for all discount factors in period one. Our analysis also reveals that the optimal price decreases with the discount factor when pooling contract is offered in period one and increases with the discount factor when separating contracts is offered in period one.

Keywords

Sales force / sales effort / selling abilities / pricing

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