Academic journal article Administrative Science Quarterly

Market Uncertainty and the Social Character of Economic Exchange

Academic journal article Administrative Science Quarterly

Market Uncertainty and the Social Character of Economic Exchange

Article excerpt

1990 "Neither market nor hierarchy: Network forms of organization." In Berry M. Staw and L. L. Cummings (eds.), Research in Organizational Behavior, 12: 295-336. Greenwich, CT: JAI Press.

Selznick, Philip 1949 TVA and the Grass Roots. Berkeley: University of California Press.

Shapiro, Carl 1983 "Premiums for high quality products as returns to reputation." Quarterly Journal of Economics, 98: 659-679.

Simon, Herbert A. Organization scholars have long been interested in organizational responses to the uncertainty surrounding transactions (Simon, 1957; Thompson, 1967). Most researchers in this area have argued that organizations respond to uncertainty by removing transactions from the market and placing them in a more hierarchical context. Though this response is most clearly articulated in the transaction cost framework (Williamson, 1975, 1985), resource dependence theorists assert similarly that organizations manage transaction-related uncertainty by transforming exchange relations into power relations and thus implicitly removing them from the "pure" market context (Selznick, 1949; Pfeffer and Salancik, 1978). Chandler (1977) also contended that the increasing complexity and uncertainty brought about by the historical expansion of markets precipitated the replacement of the market's "invisible hand" with the "visible hand" of managerial hierarchy.

In this paper, I focus on an alternative organizational response to market uncertainty. I argue that in order to avoid the problems posed by market uncertainty and forestall market failure, organizations adopt a more social orientation, taking the social structural position of potential exchange partners as cues and adhering to a principle of exclusivity in selecting exchange partners. There are two manifestations of this relationship between uncertainty and exclusivity. First, the greater the uncertainty, the more likely it is that organizations will engage in exchange relations with those with whom they have transacted in the past. Second, the greater the uncertainty, the more likely it is that organizations will enter into exchange relations with other organizations of similar status. A study of exchange relations in the markets for investment grade and non-investment-grade debt examines this hypothesized relationship between uncertainty and exclusivity.

The relationship between uncertainty and exclusivity has important implications for at least two market outcomes. First, it has implications for market concentration. The more that high-status actors restrict their exchanges to others of high status, the wider are the niches that are available to the low-status actors. Somewhat paradoxically, therefore, the more pronounced is the status-based homophily in a market, the greater are the opportunities for lower-status actors in that market. Second, this analysis affords insight into a market outcome that economic approaches to the market rarely consider: who exchanges with whom. Rather than abstracting from or taking exchange pairs as a given, this paper regards the actual pattern of exchanges as a central market outcome to be explained. As a consequence, boundaries within the market, and not just boundaries between market and hierarchical forms, are opened to theoretical analysis and empirical inquiry.

Exchange and Uncertainty

Social scientists have traditionally attributed an asocial orientation to market action. As Weber (1978: 636) observed, "the market community as such is the most impersonal relationship of practical life into which humans can enter with one another. . . . The reason for this impersonality is its matter-of-factness, its orientation to the commodity and only to that." Weber believed the perceived value of an exchange opportunity to be contingent only on what is offered, not on who makes the offer. This asocial orientation is an ideal type, however, appearing only among actors having full information about what is exchanged. …

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