A Status-Based Model of Market Competition

By Joel Podolny
1992| Working Paper No. 1196

This paper explores the significance of status processes for generating and reproducing hierachy among producers in a market. A producer’s status is defined as the degree to which market participants perceive the quality of its product to be superior to that of its competitors, and a “loose linkage” between status and actual quality is posited. Because of this loose linkage, it is possible to distinguish between a producer and a status position in much the same way that the distinction is drawn betweeen actors an positions in organizational contexts. The status position of a producer circumscribes the producer’s actions by providing a unique cost and revenue profile for manufacturing a good of a given level of quality. Specifically, a higher status producer can offer a good of a given quality at a lower cost and potentially higher revenue than its lower status counterparts. The relatively advantageous cost profile insulates the higher status producer from a “bidding war” with lower competitors and provides it with an incentive to reproduce its level of quality. At the same time, the higher status producer is prevented from invading low status niches by a constraint implicit in its identity. To increase its market share through the formation of additional exchange relations with other market actors is to change how it is perceived and, thus, potentially undercut the source of the initial advantage. An examination of pricing behavior among investment banks in the underwriting of corporate securities provides empirical support for this status-based model of market competition. Extensions are discussed.