Principal-Agent Model

The principal-agent model in reality is more like a triangle relationship, in which the agent has two principals. The problem usually occurs when two principals are looking for two different goals. In that case, it is agent’s responsibility to balance between the benefits of the two and find out the best solution to satisfy both principals. This happened to me when I am doing the internship I mentioned in the previous blogs, a program manager of an education company called genius education. I found the key is not to be driven blindly by the requirement from neither the boss nor from clients but to understand the bottom line of two principals and come with an eclectic solution.

Because I had been working for the pre-design of the Model United Nations program for a whole semester and knowing the every detail of this program, I attended the first conference with a local high school to introduce our program. During the first contact, the principal is quite satisfied with our program and assign the further discussion to the vice principal of international education department. Just as usual, the further discussion is about the key of every business, the price. My boss, Mr Li’ target price is 3000 thousand dollars each student while the vice principal insisted on the a discount of 500 dollars discount for each student. No surprise, the first meeting did not end up with an agreement. Have to go for promoting the program in another city, Mr Li asked me to keep in touch with the vice principal and told me the final price must be 3000 dollars each student.

Obviously, I was the agent who stayed between two principals and was expected to figure out what to do. After the first meeting, I realized the vice principal did like our program but not satisfied with our price,so I thought maybe we can offer some extra service to negotiate for the same price. Agreed by Mr. Li, I went to meet with the vice principal to further discuss on the deal. Completely different from what I had anticipated, the vice principal was not interested in our offer that we can offer a free training course on MUN once a week for a month as well as applying visa for students for free. Instead, he told me that the school has two major concerns,one is the safety of students and the other is the fair price for students.

After giving the feedback and asking for if there is any room for price cut, I was told the price has to stay the same since it has to stay the same for all the twenty school (some school has already agreed on the price). Refused by both sides, I was on my own again. I decided to ask my colleagues in Nanjing for help, they gave similar feedbacks to me as well. Since the southeastern part of China is stronger than the northern part in economy, the teachers have more experience and alternatives to negotiate with education companies like us, making the program run well on the northern part and not so well on the south. Having achieved conclusion with my colleagues that we should  focus on the long-term cooperation with those high schools which have more target students to take part in this program. We went to meet with Mr. Li in shanghai and talked about the compromise plan. He agreed with our idea and gave us the changed plan which keeps the price at 3000 dollars but covered the fee for a teacher chosen by school to look after students.

It turned out to solve the problem immediately, most schools are satisfied with the changed plan which assured the safety of students would be under the protection of the chosen teacher and lowered the price in total ( not for students ironically). What I learnt in this case is that for agent, it is important to understand both the boss and the school want as much profit as possible and if we have to make any compromise, make it to those who make the decision( the school not students ).

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2 comments

  1. profarvan · November 10, 2014

    Your example is more like a broker (middleman) than an agent since you yourself were not providing a service, but instead trying to arrange for a deal. As a middleman, it is definitely the case that you must walk the line between the two parties and look for possible compromises. Note that in the language of our class, the compromise is about trying to change the came from zero-sum, just about the price, to one where Pareto improvement can be made – adding the safety dimension. That is just how bargaining should happen, as I explained when we considered procurement in class.

    I can only guess why Mr. Li wanted to keep the price fixed. So let me ask a further question. Did it matter how many students would participate at that price? If most of the costs are really fixed costs, revenue depends both on volume and on price. So I didn’t quite understand why price was the only concern here.

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    • shiyuchen1992 · November 10, 2014

      As I explained in the essay, the price has to stay the same for all the students participating in the program and half of the school had already agreed on the deal at that time, that’s the reason he gave me previously. However, for this program, how much more profit we could make did highly depend on the number of additional students and because of that my colleagues and I decided to ask for a changed plan from Mr. Li. What I think is he didn’t think it was a good time to give up bargaining for a good price.

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