The Anatomy of a Price Cut: Discovering Organizational Sources of the Costs of Price Adjustment*

We use qualitative data to analyze the key elements of the price adjustment processes used at a large industrial manufacturer and several of its major customers. We focus on a specific episode, a price cut, which most vividly exemplifies the themes that emerge from our data. In the specific episode, market forces clearly dictate that the firm should cut prices, and everyone in the firm agrees with this assessment, suggesting a fairly straightforward decision where the organizational price adjustment costs ought to be low. 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. We document four specific organizational themes that emerge from the analyses of the data. (1) Each manager or each group within the firm handles only a part of the economic complexities of a given problem, using partial (albeit coherent) models of the marketplace. (2) Yet, when viewing the organization as a whole, across the different managers and groups, most of the economic complexities are dealt with. Thus, economics is not being done by individuals; rather it is an organizational issue. (3) The partial models used by managers may compete, conflict or collide creating organizational costs of price adjustment. (4) These frictions raise deep organizational issues which need to be resolved, suggesting an additional source of adjustment costs.