Extending the Cyert-March Duopoly Model: Organizational and Economic Insights

Two studies were conducted to further explore the organizational and economic insights provided by the Cyert-March duopoly model (C-M) described in A Behavioral Theory of the Firm (ABTOF, Cyert and March 1963). Study 1 examined the extent to which two firms that differed solely in the decision behavior of a routine would also differ in organizational (quasiresolution of conflict, uncertainty avoidance, problem-driven search, and organizational learning) and economic (profit, price, market share, cost) measures and impacts. Three such manipulations were separately examined, where each manipulation altered the relative propensity of the firm to be more or less reactive to three events: production growth pressure, price adjustment under organizational goal conflict, and initial price adjustment under profit goal failure. Analysis of the behaviors revealed how subtle changes in these key routines could generate complex organizational and economic effects that impact firm success. The dominant result demonstrated that organizations that did not perform well organizationally did not perform well economically. In addition, higher reactivity resulted in higher costs, in part because of quantified organizational constructs (e.g., slack, pressure). Study 2 examined the data from the first study to determine the extent to which the performance of the duopoly was consistent with a set of eight stylized economic facts drawn from the empirical literature on oligopoly. Study 2 demonstrated consistency with five of the eight stylized economic facts and provided partial support for two others. We conclude that behavioral constructs of ABTOF, as articulated in the Cyert-March duopoly model, provide behavior and performance capabilities that bridge the gap between game-theoretic models of duopoly and the computational and informational realities of organizations.