The USA corporation Sears Roebuck has a wide sprawl network of department stores. Since it was founded it has been selling through catalogues and mail, benefiting from a reputation of a guaranteed quality distributor. In 1992, however, Sears had to pay 200 million dollars in order to prevent litigation started by several states. They were accusing Sears’ repair department of charging each about $230 to its clients for unnecessary repairs. As a consequence of the settlement, Sears’ shares fell 6 per cent in the New York Stock Exchange. In the course of investigation it was found that the employees had been paid according to an incentive system based on commissions. The commission depended on the amount of money the client was charged and there were some minimum levels to be met. A failure to meet the objective level could have ended in dismissal.
1. Why do you think Sears enter the market of repairs? Suggest an explanation based on the nature of the service and the competitive advantages of the company.
2. Suggest two solutions of the problem. (At least one should have an economics focus, e.g. put more emphasis on the restrictions over individual behavior instead of analyzing preferences.)
3. In addition to the inadequate incentive system should we consider as a source of the problem a possible opportunistic behavior on the part of Sears with respect to its badly informed clients? Who could have behaved opportunistically? (Hint: Sears is a corporation with specialization of ownership and control.)
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