Parkleigh Pharmacy is a small department store in Rochester, NY, specializing in upscale, expensive personal accessories (e.g., sunglasses, beauty aids, leather goods) and home decorations (e.g., crystal, china, table lamps). Macy's is a large national department store chain with several stores in the Rochester area. Macy's carries a broader range of products and caters more to middle-income consumers.

Salespeople at Parkleigh are paid a straight hourly wage (i.e., no sales commissions). In addition, they are entitled to a 30 percent discount on anything they buy at the store. By contrast, salespeople at Macy's are paid an hourly wage (lower than the hourly wage paid at Parkleigh) plus a commission of 8 percent on sales they make. They receive no discount on products they buy at Macy's.

1) Why do you think the compensation plans differ at the two firms? In particular, why do you think Macy's pays commissions to salespeople, while Parkleigh does not? Why does Parkleigh offer employees discounts on purchases, while Macy's does not?

2) Assume, for the moment, that neither store pays sales commissions. Parkleigh offers an hourly wage plus the employee discount. Macy's offers only an hourly wage. Do you expect Macy's hourly wage to be higher or lower than Parkleigh's? Why?