Credence good. Legal advice is a credence good. The buyer cannot judge quality before purchase, and often not afterwards either. This explains the strong supplier power.
Bilateral price formation. The price is not set by the market. It is negotiated bilaterally. There is no market price. The split between firm and client is determined by bargaining power.
Reference price. The buyer’s willingness to pay is anchored to the price last paid. It adjusts upwards quickly, downwards slowly. A price level, once established, locks in.
Missing comparability. Under hourly logic, offers are not comparable. Without comparability, no price competition emerges.
Mutual information gaps. Both sides negotiate with incomplete information. The firm does not know its effort and cost. The buyer has not calculated the value of the outcome (willingness to pay).
Low price elasticity. Demand is event-driven, not price-driven. Price elasticity emerges only through substitution (which requires comparability) or scope reduction, rarely through outright refusal.
Heterogeneity of service. Matters vary in complexity. Where specifiability is high, a fixed price works. Where it is low, billing by effort dominates.
Pocket-price erosion. The firm’s realised price almost invariably sits below the list price (standard hourly rate). Discounts, write-offs, invoice reductions. Without pricing governance, margin erodes.
Fixed-cost dominance. The legal advisory business is fixed-cost dominant. Profitability reacts disproportionately to revenue changes.
Perishability. An unbilled lawyer hour cannot be stored. AI increases the number of these hours. Revenue falls, costs remain.
AI and distribution. AI lowers production costs. How this gain is distributed depends on buyer bargaining power and supplier marketing strategy.
Conclusion: hours × hourly rate does not do the job. And none of us will live to see the end of the billable hour.