Handbook on the Economics and Theory of the Firm
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Handbook on the Economics and Theory of the Firm

Edited by Michael Dietrich and Jackie Krafft

This unique Handbook explores both the economics of the firm and the theory of the firm, two areas which are traditionally treated separately in the literature. On the one hand, the former refers to the structure, organization and boundaries of the firm, while the latter is devoted to the analysis of behaviours and strategies in particular market contexts. The novel concept underpinning this authoritative volume is that these two areas closely interact, and that a framework must be articulated in order to illustrate how linkages can be created.
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Chapter 10: Behavioural Theory

Peter Earl


Peter E. Earl 10.1 INTRODUCTION Proponents of the behavioural approaches to the firm believe it may be unwise to begin theorizing about firms from the comfort of one’s armchair with analytically convenient assumptions. Rather, one should first try to acquire knowledge about the behaviour of actual firms and human decision-makers in general. This research strategy has a long history. Over a century ago, Marshall’s evolutionary view of the firm reflected his considerable knowledge of actual firms, while early work on mark-up pricing by Hall and Hitch (1939) was based on interview/questionnaire data. However, what emerged as the behavioural theory of the firm during the 1950s and 1960s via the work of Herbert Simon, Richard Cyert and James March and their colleagues at the Carnegie Institute of Technology in Pittsburgh (later Carnegie-Mellon University) reflected not just knowledge about firms but also insights from psychology, sociology and organizational science. The key contribution is Cyert and March’s (1963) book A Behavioral Theory of the Firm. This not only offered a view of the firm that was radically innovative in analytical terms but it looked unlike any previous economics book since it was replete with complex decision-tree diagrams and masses of computer program code. Cyert and March’s book broke new ground by focusing on the firm as an organization of diverse interest groups trying to cope with the complex challenges arising from external forces and internal politics. It portrays the firm’s behaviour as being both driven by expectations and shaped by its past. It...

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