Abstract:
In theory, discretionary pricing enhances company performance by enabling managers to incorporate local information. However, in practice, managers may be prone to behavioral biases that can lead to sub-optimal decisions. This paper investigates the effectiveness of discretionary pricing and behavioral elements on pricing decisions through a series of field and lab experiments. Collaborating with a pharmacy chain retailer, we first analyzed a field experiment that delegated pricing authority to local pharmacy managers. We find that managers only began engaging in discretionary pricing after two months of experiment implementation, and they tended to raise the prices of high-priced drugs, resulting in significant sales and revenue losses. This effect was particularly prominent among less experienced managers and in low-competition stores. We further designed a series of lab experiments to generalize our field observations and explore possible behavioral drivers. We requested lab participants to make pricing de
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scoco@ceibs.edu