I spent four years building and running pricing frameworks at a specialty activated-carbons company — first as an analyst, then leading the function. We served industrial buyers across India, Europe, and Asia, in a market where the raw material was coconut shell charcoal, the product was activated carbon of varying grades, and the pricing problem was genuinely hard: thin margins, volatile inputs, oligopolistic competition, and buyers who understood cost structures better than we did.
Before that, I'd studied economics at JNU, where I learned market theory from first principles — supply and demand, price elasticity, marginal cost pricing, Walrasian equilibrium. The models were elegant and internally consistent. They were also, I discovered, almost entirely unhelpful for actual pricing decisions.
This essay is about what I learned from the gap between theory and practice — and why I think that gap is not a failure of theory but a signal about where theory needs to go.
Lesson one: prices are not discovered; they are constructed
The textbook model of price formation is a discovery process. Somewhere out there, for every good, there exists a market-clearing price where supply equals demand. The price mechanism discovers it through the interaction of buyers and sellers.
In practice, I never once experienced price discovery in this sense. What I experienced was price construction — a deliberate, strategic, information-intensive process of deciding what to charge, to whom, under what terms, and with what justification. The "market price" for activated carbon didn't exist as a single number we could look up. It existed as a range, conditioned on grade, quantity, delivery terms, relationship history, competitor behavior, and the buyer's alternatives.
Every price we set was a strategic choice, not a market outcome. And the quality of that choice depended not on understanding "the market" in the abstract but on understanding the specific transaction we were pricing — the buyer's cost structure, their switching costs, their procurement timeline, and what our competitors were likely to offer.
This sounds obvious from a business perspective. But it's a significant departure from how prices are theorized in economics. The models that were most useful to me were not supply-and-demand equilibrium models but game-theoretic models of strategic interaction under incomplete information. The question was never "what is the right price?" It was "what price can I justify, given what I know about the other players in this specific transaction?"
Lesson two: cost-plus pricing is not irrational
In economics and in business school, cost-plus pricing — setting prices as a markup over costs — is treated as a mark of unsophistication. Sophisticated firms use value-based pricing, competitive benchmarking, or willingness-to-pay analysis. Cost-plus is for firms that haven't learned better.
I used to believe this. Then I spent four years in a market where cost-plus pricing was not only rational but strategically optimal under certain conditions.
Here's why. In commodity-adjacent markets with volatile input costs, the primary strategic challenge is margin stability, not margin maximization. If coconut shell charcoal prices spike 40% in a quarter — which happened — and you're locked into value-based pricing commitments that don't adjust, you eat the loss. Cost-plus with a transparent pass-through mechanism gives both you and the buyer predictability. It converts a volatile margin into a stable one, which is often worth more than a higher but uncertain margin.
More importantly, cost-plus pricing in long-term industrial relationships serves a trust function. When we showed buyers our cost structure and applied a transparent markup, we were signaling commitment to a fair-dealing norm. That signal had economic value — it reduced the buyer's incentive to constantly shop alternatives, lowered our customer-acquisition costs, and enabled the kind of long-term contracts (including the $2M European contract we negotiated) that value-based pricing with opaque margins could not have supported.
The lesson: pricing strategies that look irrational in a textbook model can be rational in the context of the institutional norms and relationship structures that govern actual markets. The model is incomplete, not the practitioner.
Lesson three: information asymmetry runs both ways
Economics models information asymmetry primarily as a problem: lemons, moral hazard, adverse selection. The party with less information gets exploited by the party with more.
In real pricing negotiations, I found that information asymmetry is mutual and strategic. We didn't know the buyer's true willingness to pay. The buyer didn't know our true cost structure (or pretended not to). Both sides were simultaneously trying to extract information from the other while protecting their own.
The interesting thing is that this mutual opacity was often functional. It created bargaining space. If both sides had perfect information, there would be exactly one equilibrium price, and the negotiation would be purely distributive — a fight over surplus. With mutual incomplete information, there was room for creative deal structures that expanded the pie: volume commitments in exchange for price stability, quality guarantees in exchange for longer contract terms, co-investment in logistics in exchange for exclusivity.
These deals didn't arise from eliminating information asymmetry. They arose from managing it — from each side selectively revealing information to enable joint value creation while protecting their competitive position. This is closer to the mechanism design literature than to standard competitive theory, and I think it more accurately describes how prices are actually formed in B2B markets.
Lesson four: the market is not a mechanism; it's a relationship
The deepest thing pricing taught me is that the market — at least in the industrial context I operated in — is not well-described as a mechanism. It's better described as a network of ongoing relationships, each governed by its own norms, expectations, and history.
We had buyers we'd worked with for eight years who got different pricing treatment from new buyers — not because of volume differences but because of relationship capital. We had competitors who we tacitly coordinated with on certain dimensions (quality standards, delivery norms) while competing aggressively on others (price, innovation). We had suppliers whose behavior was shaped as much by family relationships and community norms as by economic incentives.
None of this is irrational. All of it is invisible to standard market models. And all of it is, I think, deeply relevant to how institutional theory and behavioral strategy think about competitive dynamics — particularly in emerging markets, where relational governance often substitutes for or complements formal institutional governance.
What this means for research
I'm not arguing that market theory is wrong. The models of supply, demand, and equilibrium are powerful abstractions that capture real forces. What I'm arguing is that the gap between theory and practice is itself an interesting object of study — and that practitioners who have experienced that gap firsthand bring something to research that purely theoretical or empirical researchers may not.
My own research interest in institutional and behavioral strategy is, in part, an attempt to theorize the things I saw in pricing that the textbooks couldn't explain: the role of institutional norms in shaping competitive behavior, the cognitive frameworks that decision-makers use under genuine uncertainty, and the relational structures that govern how markets actually function in contexts where formal institutions are incomplete.
Four years of pricing didn't make me a worse economist. It made me a more honest one.