When behavior matters: Games and computation in A Behavioral Theory of the Firm

Michael J. Prietula, Harry S. Watson
2008 Journal of Economic Behavior and Organization  
A game-theoretic rendering of the duopoly model described in Cyert and March (1963) was developed, sans behavioral constructs, and the equilibria values for the two economic decision variables (price and advertising expense) were derived assuming either noncooperative or cooperative strategic behavior. The results were compared to a computational form of the same model that additionally supported behavioral constructs and learning. A second study was conducted to examine the effects of setting
more » ... he initial conditions of the computationalbehavioral model to the price and advertising equilibria of the game-theoretic paradigm (reflecting cooperative and noncooperative strategies). The results of the first study indicate that the computational-behavioral model consistently performed in a hybrid manner, neither purely cooperative nor noncooperative as suggested by the game-theoretic paradigm. Pricing choices of the computational-behavioral model most resembled the noncooperative strategy, but the choice of advertising expenditure was lower than that predicted by the game-theoretic strategy (cooperative or noncooperative). Firm performance, as measured by discounted profits, was significantly higher in the game-theoretic analysis  an outcome that might be expected given the limited organizational realism in this paradigm. The second study demonstrated that initializing the decision variables of the computational-behavior models to those of the economic equilibria resulted in the firms' pricing strategies shifting toward that found with noncooperative behavior, while the firms' advertising strategies shifting toward that found with cooperative behavior. Firm performance, in terms of discounted profits, was substantially improved when firms were given noncooperative initial values but was worse when firms were given cooperative initial values.
doi:10.1016/j.jebo.2006.12.005 fatcat:lf37jyv3fzabbnuypjpbjpog7i