Status

The status of a social actor is commonly defined as the hierarchical position the actor occupies within a social system. Status is important because resources and opportunities typically accrue disproportionally to the social actors in higher-status positions and because it provides a social identity that embeds actors socially and culturally in their social systems. By embedding actors in social systems, status specifies the role expectations that are used in their social system to evaluate individual behaviors and performances, thus providing the underpinnings of reputation. Specifically, reputation is a prediction of future behaviors and performances that is based on how past behaviors and performances meet the role expectations associated with a particular status position.

Status and reputation are, in other words, distinct but intertwined theoretical constructs. Meeting status-based role expectations is the key inflection point from which positive (when role expectations are exceeded) and negative (when role expectations are not met) reputations form. And building a positive reputation by exceeding the role expectations for a particular status position is an important mechanism to ascend the status hierarchy. This entry first discusses the historical development of status theory and how status is viewed in terms of social systems, market competition, and market identity. It then discusses the consequences of status in markets, looking at market advantage, uncertainty, and constraint.

A Brief History of Status Theory

Status and Social Systems

Status theory builds extensively on the works of Max Weber, Ralph Linton, and Robert Merton. Weber defined status (or, more accurately, stand) as a claim to social esteem in the form of positive or negative privileges and argued that status hinders the free development of markets by restricting social relations and monopolizes resources and opportunities. Linton defined status as a position in a particular social system that encompasses a collection of rights and duties and noted that roles represent the dynamic aspect of status that allows individuals to exercise the rights and duties that constitute their status position. Merton added that each status involves multiple roles (a role set) and that each social actor through his or her participation in different social systems occupies different statuses simultaneously (a status set) and over time (a status sequence). Based on the work of Weber, Linton, and Merton, status is commonly defined as a position in a social system that can be ranked among other positions based on relative prestige or social esteem. Each status position encompasses a social identity that captures the shared role expectations that define how to act appropriately in the status position, expressed as lifestyles (Weber), attitudes and behaviors (Linton), or cultural expectations (Merton). Status is, in other words, an essential aspect of social systems: Status defines who the social actors are and, through roles, what to expect of them.

Status and Market Competition

Joel Podolny focused specifically on the importance of status for firms and markets in his status-based model of market competition. Markets are, according to this model, status orders in which status positions circumscribe the actions of producers by giving them unique cost and revenue advantages for producing goods at given quality levels.

The status-based model makes two main contributions to status theory. First, the status-based model emphasizes that status functions as a signal of quality when product quality is uncertain prior to an exchange (Podolny defined status initially as a signal of quality but eventually adopted the common status-as-position definition). Status functions as a signal of quality because status positions entail shared expectations for quality. Moving into a status position implies having met its expectations for quality, and failing to continue meeting expectations for quality threatens the status position achieved. Second, the status-based model emphasizes status homophily or affiliations between similar-status social actors in social exchanges. Status homophily occurs because of relational status leakage: Higher-status exchange partners increase the focal actor’s status, whereas lower-status exchange partners decrease it, thus favoring same-status affiliations in equilibrium. Status homophily shapes market structure by stratifying firms into hierarchical status groups, and status leakage prevents the high-status firms enjoying the most status advantages from monopolizing the entire market by discouraging them from expanding into lower-status market segments.

Status and Market Identity

The status-based model of market competition has been widely corroborated: Status is important when product quality is uncertain, and status homophily is important for relationship formation. The initial definition of status as a signal of quality limits status theory unnecessarily, however, and tends to confound status with other signals of quality including reputation.

Recent status theory has returned to the classical definition of status as a position in a social system to broaden the relevance of status theory. Specifically, status provides a social (market) identity that captures a broader range of normative expectations that extend beyond narrow quality prescriptions for defining appropriate behavior, such as the types of businesses a firm can enter and how to compete in these businesses. By defining appropriate behavior, status provides a mechanism to manage accountability. Accountability refers to the implicit or explicit expectation that firms can explain and justify their behavior and performance to internal and external audiences. Whereas the main concern for the signal approach to status is making the right exchange partner decision in uncertain contexts, the main concern for the accountability approach is to avoid being blamed for making the wrong decision. Regardless of a priori quality uncertainty, choosing a high-status exchange partner decreases the likelihood of being held accountable and blamed for making the wrong decision even if the high-status partner fails to meet quality expectations.

The Consequences of Status in Markets

Status and Market Advantage

Status increases the perceived product quality and reduces the risks of exchange relations, which increases the price high-status firms can charge for their products and decreases their costs of producing a given level of quality. The economic advantages of status tend to be self-perpetuating because profits from the favorable price-cost spread can be invested in product improvements, which makes high-status firms even more attractive exchange partners, thus allowing them to increase their price and reduce their costs further. Because the advantages of status are often transferable across markets, new market entry is easier for high-status firms and provides high-status firms an advantageous basis for diversification. Status also provides a source of agency that gives high-status firms more control over their surroundings and freedom to act more independently. The agency of high-status firms stems both from their bargaining power and the ensuing ability to extract favorable contract terms and from their ability to deviate from the non-status-threatening or peripheral role expectations that nonetheless constrain other firms. High-status firms experience lower conformity pressure because they have already established their legitimacy and often feel secure in their status position, which makes them more willing to experiment with their business models than middle-status firms experiencing higher conformity pressure because they want to move to the high-status position.

Status and Market Uncertainty

Status is valuable not only when the quality of a specific product is uncertain but also when the legitimacy of a specific practice is uncertain. The legitimacy of a practice refers to the social acceptability of the practice. New innovations can create legitimacy concerns for firms having to decide whether or not to adopt the innovation. Status-based imitation helps resolve the uncertainty by shifting focus from the legitimacy of the innovation itself to the status of earlier adopters. Imitating high-status firms reduces legitimacy concerns because high-status firms are unlikely to knowingly adopt illegitimate innovations that would jeopardize their status position; they are likely to know what is legitimate because of their central location in their industry; and they have the ability to shape the public opinion about innovations whose legitimacy is yet to be decided. Should a new innovation be later considered illegitimate by the relevant stakeholders, having imitated the high-status adopters helps the accountable managers avoid blame for adopting the innovation. Should a new innovation be considered legitimate, however, and give the early adopters a competitive advantage, not having imitated the high-status adopters makes it easier to blame the managers for not adopting the innovation. Although most research focuses on the adoption of new innovations, status-based imitation applies also to the abandonment of established practices that have been reevaluated and found illegitimate.

Status and Market Constraint

The consequences of occupying high-status positions are not only positive. High-status firms might experience lower conformity pressure with regard to non-status-threatening role expectations, but they are also likely to experience higher conformity pressures when it comes to status-threatening expectations. High-status firms can therefore be prevented from moving into businesses and markets dominated by low-status firms even if these businesses and markets represent profitable opportunities. High-status firms failing to meet status-threatening expectations may also be punished more severely because the greater discrepancy between a priori expectations and ex post performance amplifies the disappointment experienced and the betrayal of trust.

The advantages of high-status positions can also lead to complacency and distraction. Because status shields firms from competitive pressure and creates a sense of security, high-status firms may divert more resources to nonproductive activities and ignore early signs of decreased competitiveness. And the executives of high-status firms may attribute the success of their firms to their own superiority and be distracted by the flattering attention they receive simply by virtue of the status position they occupy. Moving to a high-status position can itself have negative consequences because it removes firms from their current market position and forces them to engage with new buyers and suppliers with different expectations.

Conclusion

The hierarchical ordering of social actors into status positions is a fundamental aspect of all social systems, including markets, and status theory provides an important evolving conceptual apparatus for analyzing and understanding the behavior of social actors, including firms, in their social systems.