The gear won't shift on my 89 300e with 97,000 miles the other day after getting off from freeway. It start from 2nd gear (I think) and then shift to 3rd at a higher rpm at 4000 then won't go up anymore, I have to drive home slowly.
My shop clean the "valve body" and said this will be the first try to fix the problem with no guarantee. If it happen again, I might need to get a rebuild "valve body" which is going to cost me around 600, how does this "valve body" function in the transmission system?

You could fill pages and pages with all of the functions of an automatic trans valve body. It's the hydraulic "brain" for the trans. Do a search on vacuum modulator. You might find some interesting information.