IMPACT OF ORGANIZATIONAL-STRUCTURE ON OLIGOPOLISTIC PRICING

The main point of this paper is to suggest that to maintain price discipline, certain organizational and historical features of an industry's information set need to be maintained. In particular, the place of the pricing decision in the organizational structure of firms is a critical determinant of the equilibrium price level in oligopolistic industries offering products that are commodities. The model identifies the dynamics of oligopolistic pricing, with price discipline breaking down as a result of intensified non-price competition and decentralization of the pricing decision. Examples from the steel, nuclear turbine, airline and the telecommunication industries provide some empirical support for the model. The analysis integrates industrial organization theory and the behavioral theory of the firm. ''In fact, the one thing that his decentralization in early 1988 had accomplished was that it gave the sales force more freedom to interpret orders such as Akers's 1989 edict that losing market share would no longer be tolerated. Salesmen now had much of the control over pricing that had previously been reserved for senior management, and they realized, even if Akers didn't, that competitors' products were now so similar to IBM's that the only weapon IBM could use to stop market-share losses was lower prices. The salesmen used their weapon. They began a price war that gave customers discounts as high as 50 percent and that eventually rendered list prices meaningless. Buying a mainframe started to include as much wheeling and dealing as buying a used car.'' In Paul Carroll's, 'Big Blues: The Unmaking of IBM', page 221.