American Economic Association

Theory of the Firm: Past, Present, and Future; An Interpretation

Author(s): Richard M. Cyert and Charles L. Hedrick
Source: Journal of Economic Literature, Vol. 10, No. 2 (Jun., 1972), pp. 398-412
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/2721463 .
Accessed: 10/06/2014 21:24

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .
http://www.jstor.org/page/info/about/policies/terms.jsp

.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.

American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to Journal
of Economic Literature.

http://www.jstor.org

This content downloaded from 91.229.248.81 on Tue, 10 Jun 2014 21:24:48 PM

All use subject to JSTOR Terms and Conditions
 Theoryof the Firm:
Past, Present,and Future;
An Interpretation
By RICHARD M. CYERT
Carnegie-Mellon
University

and CHARLES L. HEDRICK

Carnegie-Mellon
University

Charles Hedrick was supportedduringthisresearchby a National Sci-

ence Foundation Graduate Fellowship. The authorswish to thankD.
Cass, R. Lucas, M. Shubik,and R. Weil fortheirconstructive
criticisms.

FliUTZ MACHLUP,in his 1966presidential place against a backgroundof understand-

addressto the AmericanEconomic Asso- ing what economists are actually doing
ciation [18, 1967], attemptedto look at the when they do research on developing de-
theoryof the firmin perspective.As a for- scriptivetheories of the firm.This paper
mer combatantin the battle to defend vir- will attemptto fill in some of that back-
tue, his account was really an attemptto ground. First,it will be desirable to make
show how much territorywas left in the some commentsabout the theoreticalcon-
hands of themarginalists. textof currentwriting.
Hence, even if the "partialequilibriumanalyst" In one sense the controversyover thethe-
knows full well that the actual situationis not ory of the firmhas arisen over a non-exis-
really a competitiveone, he probablywill still tent entity.The crux of microeconomicsis
make a firsttryusingthe competitive model with the competitivesystem.Withinthe compet-
good old-fashioned profitmaximization.
And if the
resultsappear too odd, appropriatequalifications itivemodel thereis a hypotheticalconstruct
maystillbe able to takecare of themmoresimply called the firm.This constructconsistsof a
than if he had startedwith a cumbersomeman- single decision criterionand an ability to
agerialmodel. (In sayingthis,I am showingmy get informationfrom an external world,
bias.) [18, p. 30]
called the "market"[8, Cyert and March,
More recentlywe have seen a surveyof mi- 1963, pp. 4-16]. The informationreceived
croeconomicsthrough curmudgeonlyeyes fromthe marketenables the firmto apply
[25, Shubik, 1970]. This surveywas essen- its decision criterion,and the competitive
tially a look at various broad approaches systemthen proceeds to allocate resources
that have been taken to microeconomic and produce output. The marketinforma-
problemsand concluded with a "plague on tion determines the behavior of the so-
all yourhouses"pronouncement. called firm.None of the problems of real
We have our own view of which ap- firms can find a home within this special
proaches have been successful and what construct. There are no organizational
needs to be done now. This view will be- problemsnor is thereany roomforanalysis
come apparent soon enough. But we think of the internaldecision-makingprocess. In
it is importantthat such discussions take fact,all of the empiricalcontentin thisneo-
398

This content downloaded from 91.229.248.81 on Tue, 10 Jun 2014 21:24:48 PM

All use subject to JSTOR Terms and Conditions
 Cyert and Hedrick: Theory of the Firm
classical model lies in the descriptionof the
environmentwithin which the firmmust
operate.Even the sole objectiveof the firm,
profitmaximization,is determinedby the
environment because any otherbehaviorof
the firmwill lead to its extinction.The the-
ory of the firmis a prioriin the sense that
its behavior can be deduced fromassump-
tionsthatdescribethe environment.
More empiricalcontentcan be given to
the theoryof the firmin two ways. First,
the assumptions describing the environ-
mentcan be made morerealisticwith a re-
sultingincreased complexityof firmbehav-
ior,e.g.,inventorycontrol.If no moredetail
is added concerningthe behavior of the
firmother than by changing the assump-
tionsdescribingthe environment, thetheory
remainsa priorias the termis used above.
The second way to add empiricalcontentis
to specifysome aspects of the firm'sbehav-
ior directly.These models cease to be a
priorisince the firm'sbehavioris no longer
deduced from the assumptionsdescribing
the environment.
The two major revisionist approaches
thathave been attemptedso far,the behav-
ioral and the managerial,fall into the sec-
ond category. The behavioral approach
concentrateson makingempiricalanalyses
of decisionprocessesof individualfirmsand
incorporatingthe resultsinto models of the
firm.The managerialapproach incorporates
withinthe objective functionthe resultsof
empirical observationsof individual firm
behavior.The firmis assumed to maximize
the functionas in the standard approach.
Both approaches utilize behavioral knowl-
edge, but the models differin form.The be-
havioral model contains explicit decision
rules (generally excluding maximization).
By proper manipulation of the objective
functionone can derive from managerial
models some of the broad conclusions of
thebehavioralmodels.
The purposeof thispaper is to determine
fromcurrentwritingsthe extentto which
This content downloaded from 91.229.248.81 on Tue, 10 Jun 2014 21:24:48 PM
All use subject to JSTOR Terms and Conditions
399
neoclassical theoryis being extendedin an
a priorimannerand the extentto which it
is being replaced by one of the revisionist
approaches.
Our approach has been to surveythe lit-
eratureof the last two yearsand to catego-
rize the articles.We have examined every
articlerelated to the theoryof the firmap-
pearingin the AmericanEconomic Review,
the Journalof Political Economy and the
QuarterlyJournalof Economics for 1970
and 1971 (I-III). We have not prejudiced
our resultsby selectingonly those articles
of special interestto us or viewed as impor-
tant by some other criterion.We have at-
tempted to classify those articles that
showed a definitemodel of the firm' ac-
cordingto the degree to which that model
agrees with or departs from neoclassical
theory.The bulk of thispaper is concerned
with explainingthe resultingclassifications
and examiningin some detail illustrative
examplesof each.
This surveyis biased in two major ways.
First,it fails to show the large amount of
effortthat has gone into articlesthat make
useful commentsabout the theoryof the
firmbut do not use explicitmodels thatwe
could classify.2Second, thereis bias in our
use of onlythreejournals,even thoughwe
'The 42 articlesfoundto be relevantto thisstudy
are listedas AppendixI. We are awarethatclassifi-
cationis oftensomewhatarbitrary and apologizein
advanceto thoseauthorswho maybe perplexedby
the inclusionor exclusionof theirarticlesfromour
list.
2 The Proceedings issue of the American Eco-
nomic Reviet is particularly richin thesearticles.
We would like to call particularattentionto the
comments ofE. T. Grether and othersin theIndus-
trialOrganizationsectionof the 1970 Proceedings
[15, Grether,1970; 26, Singer,1970 and 14, Gra-
bowskiand Mueller,1970]. Their commentsalso
indicatetheneedformoredetailin modelsoffirms.
When consideringthe virtuesof the competitive
model,articleslike thoseof 0. E. Williamson[31,
1971] and J. L. Bower [5, 19,70]are also interest-
ing.Theyare representative of a growingsuspicion
thata large,horizontallyintegratedcorporation may
actuallybe moreefficient thana competitive market
in allocatingresources(particularlycapital).
 400 Journalof EconomicLiterature
picked three journals that are widely read
by Americaneconomists.Many of the mod-
els that are most directlyresponsiveto the
behavioralchallenge,particularlycomputer
simulations,are being published in other
places.3
I. Unmodified
NeoclassicalApproach
The unmodifiedneoclassical approach is
characterizedby an ideal marketwithfirms
for which profitmaximizationis the single
determinantof behavior. Thus predictions
can readilybe made by combiningthe de-
scriptionof the marketwith the resultsof
maximizationof the relevantLagrangian.
Constraintssuch as limitedinformation pro-
cessing ability of the participantsare ex-
cluded frommodels takingthe neoclassical
approach. It is basically a deductiverather
than inductive approach to describingthe
firm,in the sense thatit does not use empir-
ical observationsof the behaviorof the firm
as inputsfordevelopingmodels.
S. R. Dittrichand R. H. Myers [9, 1971]
intend their paper on Chinese agriculture
in 1937-40 to answer the question of
whethertraditionalagricultureis properly
described by the neoclassical theoryof the
firm.Since optimalallocation of labor and
capital could gain only about 6 percentin
income,theyconclude thatneoclassicalthe-
ory approximatesthe actual behaviorfairly
well. There are two problemswith thisap-
proach.The firstcomes fromthe attemptto
short-circuitthe "as if' arguments and
check profit-maximization directly.In fact
it would be convincingevidence that the
neoclassical model did hold if it were
shown that profitactually was maximized
by a set of firmsmeetingthe requirements
3A quick checkof theextensivebibliography as-
sembledby W. H. Starbuckand J. M. Dutton[27,
1971] showsthatthe computersimulationarticles
publishedin ManagementSciencealoneoutnumber
those in all economicsjournals,44 to 43. When
macroeconomic and purelymethodological articles
are notcounted,theratioincreasesto 30 to 18.
This content downloaded from 91.229.248.81 on Tue, 10 Jun 2014 21:24:48 PM
All use subject to JSTOR Terms and Conditions
placed on the theoreticalfirms.But a nega-
tive resultis inconclusivein the lightof the
"as if" justification.Second, the main pur-
pose of neoclassical theoryis to predictthe
behaviorof major economic variables. The
size of the discrepancybetween the ob-
served resultand the theoreticalmaximum
is an ambiguousmeasure forvalidatingthe
theorysince thereis no way of relatingthe
size of the profitdiscrepancyto the devia-
tion of price and output from their pre-
dicted values. For example, Dittrich and
Myersare unconcernedby a 6 percentgap
in income between actual and what would
result from optimum allocation of re-
sources. Other writersmightconclude that
a 3 percentgap is evidenceof grossmisallo-
cation [29, Thornton,1971].
Anotherarticlefittingthisclassification is
one by P. L. Swan [28, 1970]. It is a treat-
ment of the influenceof monopolyon the
introductionof new products.Swan shows
the sufficiency of certainconditionson the
demand functionto prove that a monopoly
and a competitivemarketproduce the same
products from a range of available prod-
ucts, with given technology.He findsthese
conditionsto be reasonable ones. Further-
more,he shows thata likelyresultof violat-
ing them is a speedup of introductionof
new productsby the monopoly compared
to the competitivemarket. Machlup [18,
1967] had reservationsabout whetherthe
neoclassical model was applicable to mo-
nopolies and duopolies; the numberof par-
ticipantsis small enough so that theirindi-
vidual naturesmay become relevant.In fact
this is probably more serious for duopoly
than monopoly.As will be seen below, in
the case of duopoly there is not even a
unique neoclassical solution,and we have
no choice but to talk about strategy.In the
case of a monopoly,however,there is no
opponent to predict, so the situation is
simpler.It is true that the behavior of a
monopoly may be greatly influencedby
unique policies and otherattributesof that
 Cyertand Hedrick:Theoryof the Firm
particularfirm.Nevertheless,if we ignore
these individual peculiaritieswe may get
predictionsthatwill be trueof an "average"
monopoly. Hopefully, the differencebe-
tween the predictionsof this model and a
competitivemodel will correctlyrepresent
the differencein the real world averaged
over several industries.There will be cir-
cumstances,such as policy debates, when
we are interestedin knowingwhat behavior
is a directresultof monopoly,and we will
be willingto forgiveerrorsin predictionof
any specificcase due to a failureto repre-
sent idiosyncraticbehavior.
ofthe
II. SimpleExtensions
NeoclassicalApproach
Many papers are based on fairlystraight-
forward modificationsof the neoclassical
method. They extend the model to deal
with "real-world"issues not faced by the
simple text-bookmodels, but retain the a
priori character,in that all of the detail
added is descriptive of the environment.
The firm'sbehavior is still deduced from
the assumptiondescribingthe environment.
In fact,manyof thesemodels are motivated
by the desire to show that the neoclassical
model can explain events that seem on the
surface to be explainable only by behav-
ioral rules. Even assumingthat these mod-
els describe correctlythe reaction of real
participants under the postulated condi-
tions, there is still a major problem. To
build a neoclassical model dealing with ev-
ery possible complicationsimultaneouslyis
an obvious absurdity. But the choice of
which ones are most importantcan also be
a difficulttask, especially if the effectsof
differentcomplicationsinteract.
One of the simplestextensionswas done
by Y. Barzel [2, 1970]. The objectiveof his
paper was to determinewhetherthe exis-
tence of non-price competitionhad any
effecton the validityof the argumentthat
monopolisticcompetitionleads to inefficient
operation.He proceeds by consideringin-
This content downloaded from 91.229.248.81 on Tue, 10 Jun 2014 21:24:48 PM
All use subject to JSTOR Terms and Conditions
401
creased quality or advertisingto be utility-
producingforthe buyer.Thus the buyer is
really gettinga bundle of two goods, the
basic good and a non-pricecomponent.The
effectis to add anotherdimensionto the ar-
gument,which can be carried throughin
the same way as without the non-price
component. This approach seems to be
safelywithinthe neoclassical methodology.
W. D. C. Wright [32, 1971] makes an-
other extensionwhich formallyis no more
significantthan Barzel's. Wright considers
the effectof plant location on prices of in-
puts and outputs.Transportationcosts will
be a large part of the effect,but theremay
be additional labor costs involved in at-
tractingworkersto an out-of-the-way loca-
tion. This location dependence can be
added to the profitfunctionin a fairly
straightforward way, and then conventional
maximizationdone. The result of the ap-
proach is to develop expressionsfor the
partial derivativesof the plant locationand
outputwith respectto transportation costs,
etc. The differencebetween this extension
and Barzel's is that this one is into an area
where individual plants must be analyzed.
Unless the authoris tryingto predictan in-
dustry-wide"centerof gravity,"this model
must be applied directly to real-world
plants.The paper runsthe riskof confusing
firmsas theoreticalconstructsfor building
neoclassical models with real firms.The
plantlocationdecisionwould seem a partic-
ularly dangerous place to follow a static
maximizationapproach since the decision
involves more qualitative factors (future
tax policyof cityand stategovernments, at-
titudestoward pollutioncontrol,etc.) than
the day-to-daydecisions that are the usual
subject for neoclassical models. Of course,
the model also deals with the effectof
changes of location-dependentcostson out-
put, but it would seem thatthe unextended
model could handle those costs,too.
Even furtheralong the dimensionof in-
creasingrealismin treatingactual details is
402 Journalof EconomicLiterature
a model by W. H. L. Anderson[1, 1970]. It
is an attemptto explainthe responseof em-
ploymentto seasonal productionvariations.
Inventories,both of finishedgoods and in-
termediategoods, can be used to smooth
production.He views the actual production
decision as a resultof tradingoffinventory
holdingcosts against a quadratic labor cost
function.For a given time-pathof sales, he
uses the calculus of variationsto minimize
cost. Although this model takes into ac-
count more complications,and uses mathe-
matical methodsthat are somewhatforeign
to neoclassical models, it is probablymore
nearly in the neoclassical spirit than
Wright's.The complicationsit deals with
are characteristic of theentireindustry,and
are not entwinedwith individual firmpol-
icy. Even though the process they use is
given more internalstructure,the firmsin
the model remain constructs.Nevertheless,
thismodel is not the onlyone thatmightbe
used for explaining seasonal labor varia-
tions. The assumptionsof quadratic labor
cost and no adjustmentcosts are not the
only ones thatwill lead to similarresults.If
we want to keep the model as simple as
possible,we will probablywant to use only
one of the possible explanations.But with
the "as if" philosophyprevalentin neoclas-
sical circles,it is not clear how such a deci-
sion should be made. To be fair,we should
point out that one of the main purposes of
the articleseemed to have been to pointout
that lack of uniqueness. It had been be-
lieved by some that labor-forceadjustment
costswere "the"explanationof the factthat
the labor force varied less than sales, and
this model was designed to show that the
phenomenon could be explained without
postulatingadjustmentcosts.
ofthe
III. Modifications
ObjectiveFunction
One way to break a little more cleanly
with the neoclassical approach than the
models previouslydiscussed, is to change
This content downloaded from 91.229.248.81 on Tue, 10 Jun 2014 21:24:48 PM
All use subject to JSTOR Terms and Conditions
the objective function.This modification
can be made by substitutinganotherentity
(sales, for example) for profitsand then
proceedingto maximize the new entity.A
second way is to substitutea utilityfunc-
tion (which includes the effectsof several
entities)forprofitand proceed to maximize
utility.The latterapproach enables one to
introduceargumentsinto the utilityfunc-
tion that have been ignoredby neoclassical
theory. Both of these approaches were
characterizedas "managerial"in the intro-
duction.A thirdapproach in modification is
to add a constraintto the objective func-
tion.
The firstapproach has been taken by
W. J. Baumol [3, 1959]. Since his work has
received sufficient attention,it will not be
discussed here. It is of interestto note that
in our surveyof recentjournal articleswe
do notfindanythatfollowthefirst approach.
The second approach stems from0. E.
Williamson'sworkand althoughit is not in
our survey,we will brieflydiscuss a model
taken fromhis recentbook that is a proto-
typicalexample [30, 1970]. Williamsonde-
velops a utilityfunction,U = U(S, p -
O- T) where S is staff,p is profit,p, is
minimumprofit,and T is lump sum taxes.
He thenproceedsto maximizethisfunction.
He is able to make some interesting predic-
tions about the different effectsof various
kindsof taxes. This model has greatformal
similarityto neoclassical models, and we
might be tempted to consider it just an-
other extension.In fact, however,it is an
attemptto include behavioral characteris-
tics in the model. No longeris an objective
view of the economic task sufficient to de-
terminebehavior.Some empiricalevidence
will be needed about the way management
perceivesits taskand whetherit has private
objectivesthatit triesto achieve along with
the task. It does have one advantage over
an entirely behavioral model, however.
Only one behavioral mechanism need be
chosen, the rest of the model being neo-
 Cyertand Hedrick:Theoryof the Firm 403

classical.One need not tryto build a de- theoutsideand is partoftheobjectiveeco-

tailedbehavioralmodelthatexplainsevery nomicsituation forthemanagement. Given
actionof the firm,but onlyfindone im- thatsituationand profit maximization, this
portantfactorand add it to an already modelfollows,withno need forconsider-
existingframework. That shouldnotblind ationof the actualnatureof thefirm.The
us to thefactthattheresultsof themodel fieldof publicutilitiesis, of course,an ap-
really are the consequencesof the be- propriateplace fora behavioralapproach,
havioral content.The response of this and Zajac mentionsseveralalternatives to
modelto variouskindsof taxationis differ- the Averch-Johnson model.These mustall
ent froma purelyneoclassicalmodel's. depend upon some alternativeto profit
That difference is why the model is ex- maximization, however,and so are clearly
hibitedin the firstplace, and it is clearly on a different plane.
due to Williamson's changingof theobjec-
tivefunction to fithis ideas about"slack." IV. GeneralizedMaximization Techniques
J.P. Newhouse[22,1970]takesa similar, Having consideredextensionswithina
if less formal, approach in trying to explain strictly neoclassicalstructure,and then
thebehaviorofhospital management. For a changes in the objectivefunction, we now
non-profit organization maximization is not consider models that do not use the ordi-
a relevantgoal at all, so rather than just nary maximization methods, although their
supplement it withothergoals,he replaces intentis stillthesame.Thesemethodsarise
it. He viewstheobjectiveof hospitalman- in an attempt to extendneoclassicalmodels
agementas beinga combination ofquantity to cases wherethereis uncertainty. In gen-
and quality of services rendered,con- eral, these models maximize expected
strainedby a certainmaximum deficit. The profit.Such an approachis not the only
additionof the qualitycomponentallows coursethatcould be followed,evenby an
himto explainoverinvestment in expensive, organization whosesole concernwas profit,
"prestigious" equipment,as well as differ- so in a senseit is a behavioralassumption,
encesin thetypeofcaregivenbynon-profit and any modelusingit lacksthe a priori
and profit-making hospitals.Again, al- characterof the usual neoclassicalmodels.
thoughneoclassicalmachinery is used,the However,writersgenerallytend to view
objectivefunction is suchas to haveit used maximization of expectedprofit as the ra-
forbehavioralpurposes. tional alternativeunder uncertainty, and
Thereare otherthingsthatone can do to anyotherhypothesis as havinga behavioral
the objectivefunction(besides changing color.
it). E. E. Zajac's article[33, 1970] deals Even if thefirm's attitudetowardsprofit
with the Averch-Johnson model of regu- is not adequatelyrepresented by its ex-
lated utilities.In this case ratherthan pectedvalue,as longas theattitudeis self-
changethe objectivefunction, he adds a consistentin thesensedescribedbythevon
constraint:percentagereturnon capital Neumann-Morgenstern axioms,it can still
cannotexceedsome"fairreturn" setby the be handledrelatively easily.An articleby
regulating agency.The resultis thatprofit A. Sandmo[24, 1971] is one example.In
maximization leadsto theuse ofmorecapi- fact,a firm whoseattitudes meetthesecon-
tal and less laborthanis otherwise optimal ditionswillmaximize theexpectedvalueof
forthefirm. Although thismodelmayseem someincreasing function of theprofit. This
to have a behavioralflavor,it probably deviceallowssomegeneralstatements tobe
shouldbe viewedas neoclassical.The fair made. However,to get any interesting re-
returnconstraint, afterall, is imposedfrom sultsit is necessaryto makean assumption

This content downloaded from 91.229.248.81 on Tue, 10 Jun 2014 21:24:48 PM

All use subject to JSTOR Terms and Conditions
404 Journalof EconomicLiterature
about the shape of the functionof profit.
Sandmo assumes it is convex,which corre-
sponds to an attitudeof risk aversion. An
example of the kind of result obtained is
the prediction that output decreases as
fixedcosts increase. Of course thisresultis
criticallydependent upon the convexityof
the utilityfunction.This must be called a
behavioral assumptionin the same sense as
the addition of staffto the objective func-
tion by Williamson.It has the same disad-
vantage of requiring empirical evaluation
and the same advantage of attachingonly a
single behavioral assumptionto an other-
wise a priorimodel.
The othertwo papers in thissectiondeal
with the duopoly problem. As is well-
known,the difficulty with the duopoly situ-
ation is thatthereis no solutionthatcan de-
serve to be called the neoclassical solution.
The optimum strategydepends upon the
reactionsof the otherduopolist,and there
is no obvious optimumway to predictthat.
D. K. Osborne [23, 1971] summarizesthe
situationfromthe point of view of game
theory. There is a set of widely known
strategies,and if one knows that the other
duopolist is using one of those strategies,
thereis an optimumstrategyto use against
it. There is also a maximinsolution,but in
many cases the opponentwill not be acting
to minimizeone's gain, since it is a coopera-
tive game. There are also Paretooptimalso-
lutions,which Osborne seems to thinkare
the most relevant.In fact he draws policy
implications from them, recommending
policies which prevent the occurrence of
conditionsthat make one particularlyso-
cially inefficientset of strategiesPareto op-
timal. Although one would certainlynot
call thisa neoclassical paper,it is in a sense
trying to use game theory to maximize
profits.No other behavioral rules are in-
voked than ones relevantto game theory.
It turnsout thatmuch of the difficulty of
duopolyis due to the usual assumptionthat
decisions must be made simultaneouslyby
This content downloaded from 91.229.248.81 on Tue, 10 Jun 2014 21:24:48 PM
All use subject to JSTOR Terms and Conditions
the two participants,neitherknowingthe
other's decision until he has made his. By
assuming that the participantsmake their
decisions at the beginning of alternating
periods, and follow the same decision for
two periods,Cyertand M. H. DeGroot [6,
1970] were able to come up with a single
explicit solution. Althoughthis solution is
certainlycloser to being derived from a
prioriassumptionsthan is, say, the Cournot
solution,it should be emphasized that it is
based upon a particularbehavioralassump-
tion. Each participantis assumed to make
the decision that maximizeshis total long-
run profit if the other participant also
makes his decision this way. 'This seems
generally consistentwith the neoclassical
attitude,but the assumptionthat each par-
ticipant expects the other to maximize
profitsis not imposed by the environment.
With these provisions,dynamic program-
ming allows an explicitsolutionto be de-
rived by workingback fromthe final pe-
riod. Fortunatelythe solution approaches
an asymptoteas it gets away fromthe final
period, so that the horizoncan be allowed
to go to infinity.Another indication that
thisis not reallya unique neoclassical solu-
tion is the fact that neitherfirmis as well
offas it could be with explicitor implicit
collusion. The authors [7, Cyert and De-
Groot, 1971] showed how this cooperative
situationcould develop fromthe dynamic
programmingsolutionmentionedhere by a
process of Bayesian learning. This model
representsto some extenta mergingof be-
havioralassumptionsintoa model in such a
way thatmathematicalmethodscan stillbe
used forthe analysis.
Models
V. Non-Maximizing
Finally,we come to two papers that are
explicitlynon-maximizing. This is not to say
that they postulate irrationalbehavior or
behavior resultingfrom altruismor other
non-profit motives.Some effortis spent in
both papers to justifythead hoc rulesused,
 Cyert and Hedrick: Theory of the Firm
fromthe point of view of a firmtryingto
maximize its profits.Nevertheless,the au-
thorsapparentlyfeel,forone reason or an-
other,that theycannot account forthe full
range of behavior by explicit maximizing
models.
The firstsuch model to be considered
here is in a paper by R. L. Miller [20,
1971]. It is an attemptto account for sea-
sonal employmentin the textile industry.
The authorviews firmsas holding"invento-
ries" of unused labor during the off-peak
periods. The reason for holding the inven-
tory is the avoidance of costs involved in
adjusting the labor force. To some extent
there is also a trade-offbetween labor in-
ventoryand goods inventory,since if the
holding and adjustmentcosts of the latter
were negligibleit would be possible to have
completely smooth production, hence no
need forlabor inventories.The model takes
the formof two sets of simultaneousequa-
tions: one for peak periods, the other for
off-peakperiods. Goods inventoriesare set
inventory
by a theoretically-motivated equa-
tion. Employment and hours during the
peak are determined by minimizing a
quadratic cost function. During off-peak
periods an ad hoc demand forreservelabor
equation is used, a functionof anticipated
future sales, product inventories,wages,
product inventoryadjustmentcost, and a
trendterm.The model does not assume in-
stantaneousadjustment,but involvesa par-
tial adjustment towards desired employ-
ment.
This model was compared against actual
industrydata, quarterlyfrom1960 to 1967.
The predictedsignsof the regressioncoeffi-
cients are all substantiated,and the T-sta-
tisticsappear acceptable, but it is still not
clear that this model would do any better
than an equivalent neoclassical model, say
along the lines of Anderson'smodel men-
tioned above. Althoughthe standarddevia-
tionofthemodelis halfthatof a modelwith-
out the demand for reservelabor, there is
This content downloaded from 91.229.248.81 on Tue, 10 Jun 2014 21:24:48 PM
All use subject to JSTOR Terms and Conditions
405
still a considerable componentof seasonal
variation left in the error.Unfortunately,
the r-statisticwas not given,so it is difficult
to know how much of the total variation
was explained the model.
by
The other model is G. A. Hay's [16,
1970]. At firstglance it appears to be a
maximizing model, since the solution is
derivedby maximizingrevenueminuscost.
However, the cost includes terms that
would seem quite strangein a neoclassical
model. For example, the desired level of
inventoryis defined by a + b (produc-
tion). Then an inventorycost of c + d
(actual - desired)2 iS included.Thereis also
an explicit cost for changing production
and price. The latter involves (A[P-factor
cost]).2 The justificationis that changing
prices, when there has been no change in
factorprices,will be consideredan aggres-
sive action by fellow oligopolists, while
prices that only keep pace with factorcost
are consideredallowable. The resultof the
maximizationof revenueminuscost over N
periods with a discount is a set of linear
decision rules forproduction,price,and in-
ventory.These were checked against the
paper and lumber industry,1953-66, with
reasonablygood results.Again, since there
is no alternativemodel applied to that data
for comparison,it is difficultto evaluate
success.
The classificationof this model as non-
maximizing may seem strange, since it
seems to be merelya neoclassicalmodel ex-
tended to include typesof cost notnormally
considered. However, it is unlikely that
such costs as (A[P-factor cost])2 are real
monetarycosts. The actual costs of price
change will be the same whether factor
price has changed or not. Rather,what is
being looked at is a generalized utility
functionin equivalent monetaryunits,and
"costs"are costsin a broadersense thanjust
monetary.In this case the cost of raising
price is a subjectivematterrelatedto a par-
ticular oligopolistic strategy. One could
406 Journalof EconomicLiterature
considerclassingthisas anotherexampleof of the model is an interestingand time-hon-
additionsto the objectivefunctionbut that ored one. The real question is whetherthe
is not reallyrighteither.In the case of Wil- resultshave any meaning since the model
liamson, the objective functionrepresents itself has never been in actual practice.
the real final objectives of the firm,and Given a gap, which implies inefficiency,
maximizationtakes place over every possi- how should the systembe changed? Too
ble policy. However, in Hay's model the many empiricalquestions about a competi-
policies are all given and are represented tive systemremain unsolved to use it pre-
by the cost functions.The utilityfunction scriptively.The second typeof articleis ori-
representshow close the firmis to its poli- ented toward drawing furtherinferences
fromthe theory.The approach is to take a
cies, not how close it is to its goal. The poli-
cies are ad hoc and are not entirelyconsis- particularproblem,usuallyone fromthe lit-
tent with each other. Maximizationof the erature,and attemptto analyze the prob-
utilityfunctionrepresentsa tradeoffbe- lem throughthe use of standard models.
tweenthem. This exerciseis useful for helping econo-
miststo understandthe implicationsof the
VI. Assessment of CurrentState models in existence. Unfortunatelythe
to draw defini- analysis makes no attemptto connectwith
As is obvious,it is difficult
tive conclusionsfromthe small surveywe the real world. Thus it is difficultto argue
have made. In fact,the economicliterature thatthis approach leads to new knowledge
is now so large that it is difficultto make about thereal world.
anything resembling a complete survey. Anderson'smodel in Part II (simple ex-
Nevertheless,we feel thatsomleconclusions tensionof the neoclassical approach) dem-
can be made, and we will also attemptto onstratesanotherdifficulty of the neoclassi-
speculate about futuredirections. cal model in derivingnew knowledge.The
Anymodel in any science mustultimately model used can be justifiedsolelyon an "as
be justifiedon the basis of the knowledge if' basis. The underlyingimplicitfirmdeci-
about the real world that is generatedby sion models have no provenrelationshipto
the model. This new knowledgemay come reality.Their justificationcomes fromput-
from empirical work resulting from hy- ting togethera "package" which in the ag-
potheses derived fromthe model or from gregateis not inconsistentwith some data.
theoreticalresultsthatlead to othermodels Andersonshows thathis storyis as good as
and eventually to increased knowledge a previous story,labor adjustment costs.
about the real world. As a firststep in our One method for choosing among alterna-
evaluation,it is useful to examine current tivesmightbe the actual decisionprocesses
workfromthe standpointof the generation used at thefirmlevel.
of new knowledge. In Part III (modificationsof the objec-
In Part I of this paper (the unmodified tive function)we are closerto gainingnew
neoclassical approach) we see two typesof knowledgethan in I and II. The modifica-
articles.The firstis an attemptto apply the tion of the objective functionrepresentsan
maximizationmodel directlyto an economy attempt to utilize empirical knowledge
and draw conclusionsabout the efficiency about the goals of the microeconomicunits.
of resource allocation. The model as ap- The Williamson and Newhouse works are
plied representsa theoreticaloptimumand particularlygood examples of the fruitfuil-
the attemptis to measure empiricallyhow ness of thisapproach. The power of the ap-
close an actual economycomes to the theo- proach comes fromutilizing empirical be-
retical maximumefficiency point. This use havior and building the observationsinto

This content downloaded from 91.229.248.81 on Tue, 10 Jun 2014 21:24:48 PM

All use subject to JSTOR Terms and Conditions
 Cyertand Hedrick:Theoryof the Firm
the objective function.The question that
arises is whetherthe individual arguments
are best treatedby combiningthem into a
single objective function.We suspect that
betterresultsmightbe obtainedby treating
each argumentas a separate goal and ana-
lyzingthe processesof the firmin achieving
the individualgoals.
In Part IV (generalized maximization
techniques) the approachestakenrepresent
an attemptto develop models that will im-
prove the descriptionof realityby dealing
with uncertainty.The papers in this cate-
gory are almost all theoreticaland can be
justifiedby the possibilitythat they may
eventuallylead to models withmore empir-
ical content.The importanceof developing
models that are dynamic and incorporate
uncertaintyis obvious if economicsis to ex-
plain reality.The major question again is
whetheror not by sacrificingmaximization
and some elegance, models with empirical
content can be developed more quickly.
Progressin financeis clearlybeing made in
the analysis of firmbehavior under condi-
tions of uncertainty.The concept of maxi-
mizationis retained,but the progresscomes
fromthe factthatthe objectivefunctionhas
a measurablecounterpartin the real world
[19, Mao, 1969 and 11, Fama and Miller,
1972].
The articles in Part V (non-maximizing
models) are an attemptto develop models
that incorporate decision rules that have
some empiricalvalidity.Some of the rules
are ad hoc rules of thumb,some come from
the management science literature, and
some fromthe empiricallydescriptiveeco-
nomic literature.The models are still,how-
ever, aimed at explaining the world at a
gross level-the industry.No attempt is
made to test individualdecision rules sepa-
ratelyagainstthe decisionprocessesof indi-
vidual firms.The advantages of a behav-
ioral approach are not apparentuntil there
is an attemptto test at the individual firm
level.
This content downloaded from 91.229.248.81 on Tue, 10 Jun 2014 21:24:48 PM
All use subject to JSTOR Terms and Conditions
407
Thus it seems difficultfromthisreviewof
our surveyto justifythe neoclassical model
on the basis of leading eitherto new knowl-
edge about the world or interesting theoret-
ical results.The need for the simple maxi-
mizationapproach functionsas a barrierto
reaching the world. The most interesting
resultsseem to us to stem fromthe enrich-
ment of the objective function (in Part
III). Work in this area moves the model
closer to givingmore detailed explanations
of the real world. More specifically,the in-
clusion within the objective function of
variables actually used in the decision pro-
cess increasesthe explanatorypower of the
model. The latterconclusionis true even if
the actual processof decisionmakingis not
utilizedbut is approximatedby a maximiza-
tion process. We do not wish to leave the
impression,however, that we believe be-
havioral and managerialmodels to be auto-
maticallysuperiorto maximizingones. For
example,P. A. Frost [13, 1971] gives a max-
imizingmodel to explainbanks'demand for
excess reserves. The model is specifically
designed to explain apparentlyanomalous
behavior in certainrapidly changingsitua-
tions,and does so quite well, betterin fact
than a behavioral rule that was previously
suggestedas an explanation.The majorthe-
oretical accomplishmentof that articlewas
the derivationof a stable curve of demand
for excess reservesas a functionof interest
rate. We suspect that the model was suc-
cessfullargelybecause so much information
was able to be summarized by a single
curve. Inevitably this curve representsa
somewhat gross optimum,various detailed
informationhaving been surpressed or
averaged over in its derivation. In fact
these are just the sortof characteristicswe
would expectin a behavioralrule.
The crucial problem of findinga substi-
tuteprocessformaximizationand maintain-
ing rigoris not easily solved. Nevertheless,
it is necessaryformore effortto be exerted
in this direction,especiallywhen we recog-
408 Journalof Economic Literature
nize the ambiguityof the meaningof profit
maximizationunder uncertainty.A further
difficultythat arises fromthe maximization
process is the difficulty
of rejectinga model
when the "as if"philosophynegates looking
at actual decision processes. This difficulty
is made even more severe by the recogni-
tion that some maximandcan be found to
explain any series.
In additionto the difficulties
already dis-
cussed, there is a great diversityof views
about the proper objectives of a theoryof
the firm.(The closestelementto a common
thread is the use of the maximizationpro-
cess.) Stemmingfromthe originalintroduc-
tion of the firmas a hypotheticalconstruct,
there has been a prevailing opinion that
economistsought to be interestedonly in
propositions that were true for a large
group of firms(an industry,for example).
Taking thispointof view eliminatesany in-
tereston the part of the researcherin mak-
ing observations on the way individual
firmsoperate.The economistis thenfreeto
make up a story,in the formof a model,
about the way in which decisions on some
variable of interest(prices, output,invest-
ment,advertising,etc.) are made. The story
thatis viewed as best is the one thatfitsthe
aggregatedata best.
This concentrationon group behavior is
not peculiar to economics. The social sci-
ences as a whole have been characterized
by the idea that the behavior of individual
organisms,whethermen or firms,is unpre-
dictable, hence uninteresting.That this
view is overlypessimisticmay be suggested
by the recent success in explaininghuman
problem solving on a minute-by-minute
level [21, Newell and Simon, 1972]. The
contrastin attitudesbetween the authorsof
thisstudyand the microeconomictradition
is quite interesting.Newell and Simon,to-
gether with many other psychologistsof
similarbent, seem to be constantlylooking
for ways of collecting larger and larger
amountsof data per unittime.Thus we see
This content downloaded from 91.229.248.81 on Tue, 10 Jun 2014 21:24:48 PM
All use subject to JSTOR Terms and Conditions
the utilization,firstof the thinking-aloud
protocol,and then the eye-movementcam-
era..The object is to build theorieswiththe
highest possible "density" of explained
data.
One possible path out of the dilemma
faced by microeconomicsis the route of
simulation. Simulation allows the model
builder to embed the variables that are
deemed relevanton the basis of his empiri-
cal observations.He can, as well, incorpo-
rate the actual process of decision making
and is not bound by conventionalmathe-
matics to assumingthat the economicunits
maximize.There are many examples of in-
teresting and successful simulations of
firmsand industries[10, Dutton and Star-
buck, 1971 and 17, Hoggattand Balderston,
1963]. Simulationmodels can be made for
individual units,markets,or economic sys-
tems.The models are not elegant and there
are problems in testingthe validityof the
models.
Nevertheless,these rathertrivialesthetic
problemsdo not explainwhy thisparticular
methodologyand the behavioral approach
to theory have remained relativelyinfre-
quently used in economics.Reasons spring
to mind-the statusof mathematicalmodels,
the trainingof economists,the difficultiesin
obtaining the data inherentin the behav-
ioral approach, the concern that special
models must be developed for each firm,
and so on.4All of these are reasons thatwe
believe account in part for the relativeig-
noringof an importantapproach at the mi-
croeconomic level. (Simulation has been
accepted as an importanttool at the macro-
economiclevel.)
Equally important,however, has been
the lack of agreementon the crucial ques-
tionsto which the theoryof the firmshould
address itself.The fundamentaldifference
centerson the questionof whetherthe the-
'For someparticularly cogentcritiquesofthebe-
havioralapproach,see the articleby W. J. Baumol
and M. Stewart[4, 1971].
 Cyertand Hedrick:Theoryof the Firm
ory should explain actual decision making
in the firm.The prevailingposition,and the
major rationale for neoclassical theory,is
that the actual process is irrelevant.The
critical test is predictionand any process
that produces predictionsvalid in the ag-
gregate is adequate. This position is justi-
fiedon the"as if"rationale.
On the basis of our briefsurveywe con-
clude that thereis growinguneasinesswith
the neoclassicalapproach (Parts III, IV, V)
but that the above rationaleis stillheld by
most economists. This position plus the
othervirtuesof mathematicalmodels (pres-
tige as well as rigor) maintainthe impor-
tance of the role of maximization.We see
no evidence at this time for a substantial
change despite the restrictedprogressbe-
ing made by currentapproaches. The real
world stillescapes our models; our explana-
tions remain at an aggregate level. The
problemis clearlydifficult, but we wonder
whethereconomicscan remainan empirical
science and continue to ignore the actual
decision-makingprocesses of real firms.
APPENDIX I
ARTICLES REVIEWED
ANDERSON, W. H. L. "ProductionSchedul-
ing, Intermediate Goods, and Labor
Productivity," Amer. Econ. Rev., March
1970,60(1), pp. 153-62.
AUERBACH, R. "The Effectsof Price Sup-
ports on Output and Factor Prices in
Agriculture,"J. Polit. Econ., Nov. 1970,
78(6), pp. 1355-61.
BARDHAN, P. K. and SRINIVASAN, T. N.
"CropsharingTenancy in Agriculture:A
Theoretical and Empirical Analysis,"
Amer.Econ. Rev., March 1971,61(1), pp.
48-64.
BARZEL, Y. "Excess Capacity in Monopolis-
tic Competition,"J. Polit. Econ., Sept.
1970, 78(3), pp. 1142-49.
BELLI, P. "Farmer's Response to Price in
UnderdevelopedAreas: The Nicaraguan
This content downloaded from 91.229.248.81 on Tue, 10 Jun 2014 21:24:48 PM
All use subject to JSTOR Terms and Conditions
409
Case," Amer. Econ. Rev., May 1970, 60
(2), pp. 385-92.
BERHOLD, M. "A Theory of Linear Profit-
Sharing Incentives," Quart. J. Econ.,
August 1971, 85(3), pp. 460-82.
BISCHOFF, C. W. "A Model of Nonresi-
dential Construction in the United
States," Amer. Econ. Rev., May 1970,
60(2), pp. 10-17.
BRITrAIN,J. A. "The Incidence of Social
Security Payroll Taxes," Amer. Econ.
Rev., March 1971, 61(1), pp. 110-25.
CHIPMAN, J. S. "External Economies of
Scale and Competitive Equilibrium,"
Quart.J. Econ., August 1970, 84(3), pp.
347-85.
CYERT, R. M. and DEGROOT, M. H. "Multi-
period Decision Models withAlternating
Choice as a Solution to the Duopoly
Problem,"Quart.J. Econ., August 1970,
84(3), pp. 410-29.
"Bayesian Analysis and Duopoly,"
J. Polit. Econ., Sept. 1970, 78(5), pp.
1168-84.
DirRicH, S. R. and MYERS, R. H. "Resource
Allocation in Traditional Agriculture:
Republican China, 1937-1940," J. Polit.
Econ., July1971,79(4), pp. 887-96.
EHRENBERG, R. G., "Absenteeismand the
Overtime Decision," Amer.Econ. Rev.,
June 1970, 60(3), pp. 352-58.
FROST,P. A. "Banks' Demand for Excess
Reserves,"J. Polit. Econ., July 1971, 79
(4), pp. 805-25.
GRABOWSKI, H. G. "Demand Shifting, Opti-
mal Firm Growth, and Rule-Of-Thumb
Decision Making,"Quart.J. Econ., May
1970,84(2), pp. 217-35.
GROSS,J. G. "IncentivePricing and Utility
Regulation,' Quart J. Econ., May 1970,
84(2), pp. 236-53.
HAY, G. A. "Production,Price, and Inven-
tory,"Amer.Econ. Rev., Sept. 1970,60
(4), pp. 531-45.
HAYAMI, Y. and RUTTAN, V. W. "Factor
Prices and Technical Change in Agricul-
tural Development: The United States
410 Journalof Economic Literature
and Japan, 1880-1960," J. Polit. Econ.,
Sept. 1970, 78(5), pp. 1115-41.
LUCAS,R. E. "Capacity,Overtime,and Em-
pirical Production Functions," Amer.
Econ. Rev., May 1970, 60(2), pp. 23-27.
MCCALL, J. J. "The Simple Economics of
IncentiveContracting," Amer.Econ. Rev.,
Dec. 1970,60(5), pp. 837-46.
MCCLURE, C. E., JR."Taxation,Substitution,
and IndustrialLocation," J. Polit. Econ.,
Jan.1970,78(1), pp. 112-32.
MILLER, R. L. "A Short-TermEconometric
Model of TextileIndustries,"Amer.Econ.
Rev., June 1971, 61(3:I), pp. 279-89.
NEWHOUSE, J.P. "Toward a Theoryof Non-
profitInstitutions:An Economic Model
of a Hospital,"Amer. Econ. Rev., March
1970,60(1), pp. 64-74.
Oi, W. Y. "A Disneyland Dilemma: Two-
Part Tariffsfora Mickey-MouseMonop-
oly," Quart. J. Econ., Feb. 1971, 85(1),
pp. 77-96.
OSBORNE, D. K. "The Duopoly Game: Out-
put Variations,"Amer. Econ. Rev., Sept.
1971,61(4), pp. 538-60.
PASHIGIAN, B. P. "RationalExpectationsand
the Cobweb Theory," J. Polit. Econ.,
March 1970, 78(2), pp. 338-52.
PELTZMAN,S. "Capital Investmentin Com-
mercial Banking and its Relationshipto
PortfolioRegulation,"J.Polit. Econ., Jan.
1970,78(1), pp. 1-26.
QUIRK, J.P. "Complementarity and Stability
of Equilibrium,"Amer.Econ. Rev., June
1970,60(3), pp. 358-63.
RADNER, R. and MILLER, L. S. "Demand and
Supply in U.S. Higher Education: A
ProgressReport,"Amer.Econ. Rev., May
1970,60(2), pp. 326-34.
RAFFERTY, J.A. "Patternsof Hospital Use:
An Analysisof Short-RunVariations,"J.
Polit. Econ., Jan. 1971, 79(1), pp. 154-65.
RAO, C. H. H. "Uncertainty, Entrepreneur-
ship and Sharecroppingin India,"J.Polit.
Econ., May 1971, 79(3), pp. 578-95.
ROTHENBERG, T. J. and SMITH,K. R. "The
Effectof Uncertaintyon Resource Allo-
This content downloaded from 91.229.248.81 on Tue, 10 Jun 2014 21:24:48 PM
All use subject to JSTOR Terms and Conditions
cation in a General EquilibriumModel,"
Quart.J. Econ., August1971,85(3), pp.
440-59.
SANDMO, A. "On the Theory of the Com-
petitive Firm Under Price Uncertainty,"
Amer.Econ. Rev.,March1971,61(1),pp.
65-73.
SENGUPTA, S. S. "Capacity and Market
Structure,"J. Polit. Econ., Jan. 1971, 79
(1), pp. 97-113.
SHEN, T. Y. "Economies of Scale, Penrose
Effect,Growthof Plants and Their Size
J. Polit.Econ., July1970,
Distribution,"
78(4:I), pp. 702-16.
SWAN, P. L. "Market Structureand Tech-
nological Progress: The Influence of
Monopolyon ProductInnovation,"Quart.
J. Econ., Nov. 1970,84(4), pp. 627-38.
THORNTON, J. "Differential Capital Charges
and Resource Allocationin Soviet Indus-
try,"J. Polit. Econ., May 1971, 79(3), pp.
545-61.
WEINTRAUB, E. R. "StochasticStabilityof a
General Equilibrium Model," Amer.
Econ. Rev., May 1970. 60(2), pp. 380-84.
WELLISZ, S.; MUNK, B.; MAYHEW, T. P. and
HEMMER, C. "ResourceAllocationin Tra-
ditional Agriculture:A Study of Andhra
Pradesh," J. Polit. Econ., July 1970, 78
(4:1), pp. 655-84.
WESTFIELD, F. M. "Methodologyof Evalu-
atingEconomic Regulation,"Amer.Econ.
Rev., May 1971,61(2), pp. 211-17.
WRIGHT, W. D. C. 'Some Substitution
Effectsin the Location of a Firm," J.
Polit. Econ., July1971, 79(4), pp. 903-08.
ZAJAc, E. E. "A GeometricTreatment of
Averch-Johnson's Behavior of the Firm
Model," Amer. Econ. Rev., March 1970,
60(1), pp. 117-25.
REFERENCES
1. ANDERSON, W. H. L. "ProductionSched-
uling IntermediateGoods, and Labor
Amer.Econ. Rev., March
Productivity,"
1970,60(1),pp. 153-62.
2. BARZEL,Y. "Excess Capacity in Monop-
 Ctertand Hedrick:Theoryof the Firm
olistic Competition,"J. Polit. Econ.,
Sept. 1970,78(5),pp. 1142-49.
3. BAUMOL,W. J.Businessbehavior, value
and growth. New York: Macmillan,
1959.
4. - and STEWART, M. "On the
Behavioral Theory of the Firm" in
R. MARRIS and A. WOOD, eds., The cor-
porateeconomy:Growth,competition,
and innovationpotential.New York:
Macmillan, 1971.
5. BOWER, J. L. "Planning Within the
"Firm," Amer. Econ. Rev., May 1970,
60(2), pp. 186-94.
6. CYERT, R. M. and DEGROOT, M. H.
"Bayesian Analysis and Duopoly
Theory,"J. Polit. Econ., Sept. 1970, 78
(5), pp. 1168-84.
7. , "An Analysis of Cooperation
and Learning in a Duopoly Context,"
Amer.Econ. Rev., forthcoming.
8. CYERT,R. M. and MARCH,J.G. A be-
havioraltheoryof thefirm.Englewood
Cliffs,N.J.: Prentice-Hall,1963.
9. DITTRICH, S. R. and MYERS, R. H. "Re-
source Allocation in Traditional Agri-
culture:Republican China, 1937-1940,"
J. Polit. Econ., July 1971, 79(4), pp.
887-96.
10. DUTTON, J. M. and STARBUCK, W. H.,
eds. Computer simulation
ofhumanbe-
havior. New York: JohnWiley & Sons,
1971.
11. FAMA,E. F. and MILLER, M. H. The
theory of finance. New York: Holt,
Rinehartand Winston,1972.
12. FRIEDMAN, M. Essays in positiveeco-
nomics.Chicago: Universityof Chicago
Press,1953.
13. FROST, P. A. "Banks' Demand for Ex-
cess Reserves," J. Polit. Econ., July
1971, 79(4), pp. 805-25.
14. GRABOWSKI, H. and MUELLER,D. "In-
dustrial Organization: The Role and
Contributionof Econometrics,"Amer.
Econ. Rev.,May 1970,60(2), pp. 100-
04.
This content downloaded from 91.229.248.81 on Tue, 10 Jun 2014 21:24:48 PM
All use subject to JSTOR Terms and Conditions
411
15. GRETHER, E. T. "Industrial Organiza-
tion: Past History and Future Prob-
lems,"Amer.Econ. Rev., May 1970,60
(2), pp. 83-89.
16. HAY, G. A. "Production,Price, and In-
ventory,"Amer.Econ. Rev., Sept. 1970.
60(4), pp. 531-45.
17. HOGGATT, A. C. and BALDERSTON, F. E.,
on simulation
eds. Symposium -models:
Methodology tothebe-
and applications
havioral sciences. Cincinnati, Ohio:
South-Western, 1963.
18. MACHLUP, F. "Theories of the Firm:
Marginalist, Behavioral, Managerial,"
Amer.Econ. Rev., March 1967,57(1),
pp. 1-33.
19. MAO,J. C. T. Quantitative
analysisof
financialdecisions. New York: Macmil-
lan, 1969.
20. MILLER, R. L. "A Short-TermEcono-
metric Model of Textile Industries,"
Amer. Econ. Rev., June 1971, 61(3:I),
pp. 279-89.
21. NEWELL, A. and SIMON, H. A. Human
problem solving. Englewood Cliffs,
N.J.: Prentice-Hall,1972.
22. NEWHOUSE, J. P. "Toward a Theory of
NonprofitInstitutions: An Economic
Model of a Hospital,"Amer.Econ. Rev.,
March 1970, 60(1), pp. 64-74.
23. OSBORNE, D. K. "The Duopoly Game:
Output Variation,"Amer. Econ. Rev.,
Sept. 1971,61(4), pp. 538-60.
24. SANDMO, A. "On the Theoryof the Com-
petitiveFirm Under Price Uncertainty."
Amer.Econ. Rev., March 1971,61(1),
pp. 65-73.
25. SHUBIK, M. "A Curmudgeon'sGuide to
Microeconomics,"J. Econ. Lit., June
1970,8(2), pp. 405-34.
26. SINGER, E. M. "IndustrialOrganization:
Price Models and Public Policy,"Amer.
Econ. Rev., May 1970,60(2), pp. 90-99.
27. STARBUCK,W. H. and DUTr`ON, J. M.
"Simulation Model Construction" in
J. M. DUTTON and W. H. STARBUCK,
ofhumanbe-
simulation
eds.,Computer
412 Journalof Economic Literature

havior.New York:JohnWiley& Sons, Cliffs,N.J.: Prentice-Hall, 1970.

1971,pp. 9-102. 31. , "The Vertical Integration of
28. SWAN, P. L. "Market Structure and Production Market Failure Considera-
TechnologicalProgress:The Influence tions,"Amer. Econ. Rev., May 1971,61
of Monopolyon ProductInnovation," (2), pp. 112-23.
Quart.J. Econ., Nov. 1970,84(4), pp. 32. WRIGHT, W. D. C. "Some Substitution
887-96. Effectsin the Location Decision of a
29. THORNTON, J. "Differential Capital Firm,"J. Polit. Econ., July1971, 79(4),
Charges and Resource Allocation in pp. 903-08.
Soviet Industry,"J. Polit. Econ., May 33. ZAJAC,E. E. "A GeometricTreatment
1971,79(3), pp. 545-61. of Averch-Johnson's Behavior of the
30. WILLIAMSON, 0. E. Corporatecontrol Firm Model," Amer.Econ. Rev., March
and business behavior. Englewood 1970,60(1),pp. 117-25.

This content downloaded from 91.229.248.81 on Tue, 10 Jun 2014 21:24:48 PM

All use subject to JSTOR Terms and Conditions