Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 6

You are at a cocktail party, where you meet a CEO of a pharmaceutical company who has been thinking recently about her overseas distributors who have exclusive sales territories. She can't quite figure out what is troubling her, but she is dissatisfied with these distributors. You describe the "double markup" problem. The CEOs eyes light up. "You are exactly right," she says. "The distributors are setting prices for our product that are too high." A year passes. You meet the CEO at another party. She heads straight for you and says,
"You were wrong. There was no double markup problem. After our talk a year ago, I terminated the contracts with all our overseas distributors. I sent our own people overseas to set up in-house distributors. To motivate the region managers I tied a big part of their compensation to the profitability of their regions. I was sure I would see a big change, but overseas prices are just about the same as they were when we used exclusive distributors. I guess prices weren't that bad with the distributors."
Do you think the CEO's conclusions are correct Why or why not