Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/259357 
Year of Publication: 
2006
Series/Report no.: 
Working Paper No. 2006-03
Publisher: 
Bar-Ilan University, Department of Economics, Ramat-Gan
Abstract: 
The fact that organizations find it hard to change in response to shocks in the environment is a crucial feature of the economy. Yet we know little about why it is so difficult for organizations to adjust, and where these limitations come from. In an effort to discover some of these reasons we ground ourselves in the context of price adjustment, and present a qualitative analysis of an intensive ethnographic field study of the pricing practices at a one-billion dollar Midwestern industrial manufacturing firm and its customers. We go into depth on a specific episode, a price cut, which most vividly exemplifies the themes that emerged from our data. In the specific situation, market forces clearly dictate that the firm should cut prices, and everyone in the firm agrees with this assessment, suggesting a fairly straightforward price adjustment decision. Yet when we look deeper, and dissect how the firm implemented the price cut, we uncover a rich tapestry of frictions hidden within the organization. At their core, these frictions relate to how managers, in the context of an organization, attempt to apply the fundamental elements of economic theory. Essentially they face a series of constraints that make sense in the context of an organization trying to make these adjustments, but constraints that are rarely articulated or incorporated into economic understanding of price adjustment. We discover that the largest barriers to price adjustment are related to disputes arising from collisions between "partial models" used by different organizational participants as they confront fundamental economic issues. Often, these issues have not been settled and exist in a tenuous truce within the organization – and adjustment requires the organization to deal with them in order to react to these changes.
Subjects: 
Organizational Rigidity
Organizational Cost of Price Adjustment
Menu Cost
Convex Cost of Price Adjustment
Sticky Price
Price Rigidity
Time-Dependent Model
State-Dependent Model
Colliding Partial Models
Organizational Complexity
Behavioral Theory of the Firm
JEL: 
E12
E31
L16
L20
M21
M31
Document Type: 
Working Paper

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