Embeddedness and Price Formation in the Corporate Law Market

Abstract

The determination of prices is a key function of markets, yet sociologists are just beginning to study it. Most theorists view prices as a consequence of economic processes. By contrast, we consider how social structure shapes prices. Building on embeddedness arguments and original fieldwork at large law firms, we propose that a firm's embedded relationships influence prices by prompting private-information flows and informal governance arrangements that add unique value to goods and services. We test our arguments with a separate longitudinal dataset on the pricing of legal services by law firms that represent corporate America. We find that embeddedness can significantly increase and decrease prices net of standard variables and in markets for both complex and routine legal services. Moreover, results show that three forms of embeddedness—embedded ties, board memberships, and status—affect prices in different directions and have different magnitudes of effects that depend on the complexity of the legal service.