When Behavior Matters: Games and Computation in a Behavioral Theory of the Firm

Abstract

A Behavioral Theory of the Firm presents a computational model of a duopoly that is based on observations of firm behavior and that incorporates a range of behavioral constructs. Because this model is starkly different from the traditional game theoretic analysis of duopoly, it useful to compare the performance of a game theoretic version of this model, shorn of all behavioral constructs, with the original Cyert and March paradigm. To do this we calibrate the game theoretic model with all the economic components of the computational model and we assume that firms could choose either cooperative or non-cooperative strategies. We find that the pricing strategy of the computational firms is similar to that found in a non-cooperative game theoretic outcome and that the advertising choice of the computational firms is less than what non-cooperative or cooperative game theoretic behavior would predict. We also consider how initializing the choices of the computational firms with those of the game theoretic firms affect their performance. Informing the computational firms in this way led to greater changes in advertising than pricing strategies; profits of the computational firms were greatest when their initial choices were those found in a non-cooperative equilibrium.

Keywords: organizational modeling, behavioral theory, oligopoly, simulation

JEL Classification: L13, L21, D23, D70