Customer Reviews

Status Signals: A Sociological Study of Market Competition

5 star:		(1)
4 star:		(2)
3 star:		(0)
2 star:		(0)
1 star:		(0)

 

 

`Status' is not a term widely used in economic analysis, but it is extremely common in sociological theory. Social status may be inherited, it may be acquired at great cost, and it can be dissipated through insouciance and poor judgment. Like material wealth, high status both causes and is a sign of social dominance. How, then, does social status relate to traditional economic variables? The answer is doubtless complex and ill-understood. However, in this book Podolny restricts his study to the relative status of firms in an industry, with special attention to investment banking and retail jewelry. By choosing to study firms, Podolny faces an immediate problem: status in sociological theory is well-studied and categorized as an attribute of individuals and families embedded in complex social networks, but not of firms competing in the open market. Podolny handles this problem by situating his study within the network branch of what is known as the "new economic sociology." This research area owes its inspiration to a paper by sociologist Harrison White, "Where Do Markets Come From?" American Journal of Sociology 87 (1981): 517-547, followed by a famous declaration of purpose written by White's student Mark Granovetter, "Economic Action and Social Structure: The Problem of Embeddedness" American Journal of Sociology 91 (1885): 481-510. Granovetter noted that economic theory assumes that economic actors are socially isolated Homo Economicus type that prices and market conditions as given and simply maximize utility. This assumption is tenable only if it is reasonable to assume that all economic exchanges are completely specified and costlessly enforced (e.g., by the judiciary). When these assumptions fail, which is usually the case, economic theory does not tell us why parties to exchange carry out their contractual obligations. Granovetter also notes that the traditional sociological account of contract fulfillment is that agents are socialized to internalize the norms associated with their roles, and hence are generally honest and trustworthy if society values these character virtues. Faced with the "undersocialized" agent of economic theory and the "oversocialized" agent of sociological theory, Granovetter observes that markets are in fact "embedded" in social relations that take the form of enduring informal ties among producers, between firms and their suppliers, and between firms and their customers. These repeated interactions might be called networks of principal-agent interactions, except that the new economic sociology does not generally use mathematical models to describe social interactions, and networked principal-agent models are inherently much more complex that the dyadic principal-agent models of economic theory, because the information concerning an agent's behavior is networked among a plurality of agents. I should note that it is still possible to model such phenomena mathematically (e.g., Samuel Bowles and Herbert Gintis, "Persistent Parochialism: Trust and Exclusion in Ethnic Networks," Journal of Economic Behavior and Organization 55,1 (2004): 1-23), but sociologists generally avoid explicit reliance on the rational actor model, game theory, and mathematical modeling. Podolny is no exception.

Once we situate markets in networks of embedded social relations, it becomes feasible to apply the term `status' to firms. It is tempting to equate the status of a firm with its reputation. In an industry where the quality of a good or service cannot be contractually specified, a firm might establish a standard of quality in order to expand its clientele or increase its price above the market minimum. Such a "reputation effect" is well-known in economic theory (Herbert Gintis, "The Power to Switch: On the Political Economy of Consumer Sovereignty," in Samuel Bowles, Richard Edwards, and William Shepherd (eds.), "Unconventional Wisdom: Essays in Honor of John Kenneth Galbraith (New York: Houghton-Mifflin: 1989): 65--80). However, Podolny argues that the status of a firm is not equivalent to its reputation for quality, but rather is a more diffuse hierarchical notion in which a firm's status reflects its social eminence and power. Podolny argues that firms desire high status because customers have a "conspicuous consumption" preference for high-status firms, and are willing to pay accordingly.

I think there may be something to Podolny's distinction between status and reputation. A fast food chain such as McDonald's may have a very good reputation (good value, consistent quality), but it does not have high status. Similarly, a purchasing agent may buy parts from a high status supplier rather than the highest quality supplier because, in case of quality failure, his superiors cannot fault him for his choice of supplier.

Despite these differences, I think economists might value this book because status is very close to reputation in many ways, and Podolny close empirical analysis of status in various industries provides strong support for the economic theory of reputation. Indeed, Podolny considers the central claim of his book that "the greater market participants' uncertainty about the underlying quality of a producer and the producer's product, the more that market participants with rely on the producer's status to make inferences about that quality." (p.18) The word "reputation" could replace the word "status," of course, with absolutely no loss of meaning. At some points, however, Podolny offers and tests hypotheses in which the difference between status (widely perceived position in the hierarchy of suppliers) and reputation (what the experts know about true quality) is key. For instance, Podolny notes that if one controls for the quality of a good or service, higher status leads to greater sales and higher profits. Equivalently, a high-status firm can supply lower quality goods than can a low-status firm. (p. 27)

Podolny's insights are considerable, and his empirical work is well done and deserves to be followed up by additional data gathering that might clarify the relationship between status and reputation. This book is economic sociology at its best, although I would maintain that a skilful mathematical modeler could capture many of the phenomena described herein using the rational actor model, game theory, and network analysis.

This is a good overview of the author's conception of status. That is provided in the introductory chapters. There is absolutely no grand theorising in the book, everything is empirically driven and several previously published studies are described in later chapters. For tbose of you who have read some of the author's academic articles, this book is valuable because this time he is very clear in defining what he means with status (and how it is different from reputation).

It would have been nice with a bit more deep and fundamental discussion of status in the first couple of chapters. However, that is another book. The target audience for this book is only academics studying organizational theory.

Perhaps more than anyone, Joel Podolny has explored the social dynamics of organizational status. Contrary to much conventional wisdom, organizational status reflects much more than an organization's quality (although that certainly is part of it). Podolny shows us why this is so and some of its implications.