Networks as the pipes and prisms of the market

Citation: Joel M. Podolny (2001) Networks as the pipes and prisms of the market. American Journal of Sociology (RSS)
DOI (original publisher): 10.1086/323038
Semantic Scholar (metadata): 10.1086/323038
Sci-Hub (fulltext): 10.1086/323038
Internet Archive Scholar (search for fulltext): Networks as the pipes and prisms of the market
Tagged: Sociology (RSS) Networks (RSS), Social Networks (RSS), Economic Sociology (RSS), Organization Theory (RSS)

Summary

In this article, Podolny attempts to tease apart what he argues is an important distinction between types of network ties in the literature on networks and competition and in networks and markets in particular. He argues that there are two important types of market uncertainty: egocentric and altercentric and argues that structural holes increase in value in cases of the former but not with the latter. He argues that status increases in the value in the latter but not in the former. Podolny uses data from the venture capital argument to provide empirical support for the theoretical argument.

Podolny builds on the work of Mark Granovetter's classic The strength of weak ties and Ron Burt's work in Structural holes: The social structure of competition to argue that networks can work like pipes in which information or other things can move. In these cases, the most advantage positions is one rich in either weak ties or structural holes.

But Podolny argues that his own work in (2005) Status signals: A sociological study of market competition and other work by Ezra Zuckerman (1999) in The categorical imperative: Securities analysts and the illegitimacy discount supports an alternative view of networks as prisms in that they are not carrying information but rather providing informational clues to others. In other words, its purpose is not to transmit resources but to convey information about the relative quality of the firm to others acting as an audience. In Podolny's words, "they are prisms, splitting out and inducing differentiation among actors on at least one side of the market." In these situations, a position rich in structural holes is not advantageous. Indeed, one might want an exclusive network in the status based work but an expansive network in the structural hole based work.

Podolny argues that there are two distinct types of uncertainty that can come into play. The first type, egocentric uncertainty, refers to the the uncertainty that a producer has about market opportunities and resource allocation decisions that will allow the producer to produce those opportunities. The second type is altercentric uncertainty and this refers to the uncertainty of consumers (or perhaps other partners) about the producer and their quality. Podolny argues that can be high on or low on either and creates a 2x2 with examples of each.

Podolny offers two hypotheses:

1. The more structural holes in a producer's network, the more that it will sort into market segments that are high in egocentric uncertainty.
2. The higher a producer's status, the more likely it will sort into market segments that are low in egocentric uncertainty.

Essentially, Podolny argues that there is a trade-off between status and structural holes.

Podolny offers an empirical test using data on venture capital where there is a high level of both types of uncertainty and there is variation in egocentric uncertainty and uses average investment stage of a VC's investment as a dependent variable. Indeed, the results show that a structural hole effect shows a shift from late stage to early stage and the status effect implies a shift from early stage to late stage.

Theoretical and Practical Relevance

Podolny's article has been cited more than 400 times since it was published 9 years ago, primarily in the sociological literature on organizations and networks. It does a wonderful job of pointing out a confused aspect of the academic literature on network ties and pointing to a potential way to reconcile the literature.