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Toward a Game Theory of Organizational Ecology: Production Adjustment Costs and Managerial Growth Preferences

University of Durham, UK and University of Groningen,The Netherlands, arjen.vanwitteloostuijn{at}durham.ac.uk

Christophe Boone

University of Antwerp, Belgium, Christophe.Boone{at}ia.ac.be

Arie van Lier

University of Groningen,The Netherlands, a.vanlier{at}tiscali.nl

This paper merges two theoretical perspectives in a mathematical game-theoretic modeling approach: industrial organization on the one hand, which basically is the eco nomic theory of market competition and firm strategies, and organizational ecology on the other hand, which is a major sociological tradition that studies the evolution of organiza tional populations. The merger is instrumental in analyzing a key question in strategic orga nization: what is the role of flexibility, inertia and efficiency in facilitating firm performance in a selection environment, in terms of both profitability and survival? We argue particularly that game theory can offer a mathematical model of organizational ecology. In this paper we explore two modeling examples. The first model introduces production adjustment costs and the second managerial growth preferences in a Cournot duopoly game. Both models support organizational ecology's claim that an inert firm may push a flexible rival from the market. Moreover, four additional results are worth mentioning. First, a firm's profit-enhancing flexibility or inertia profile is contingent upon the market's carrying capa city development. Second, the inert firm may even outperform its flexible rival when the inert market leader faces a cost disadvantage. Third, this may happen in a munificent envi ronment, implying that cut-throat rivalry can be the result of strategic competition only, as it is facilitated by organizational inertia. Fourth, in response to the rival's flexibility or inertia profile, a firm can calculate its profit-maximizing production adjustment cost or managerial growth objective strategy.

Key Words: flexibility • game theory • inertia • organizational ecology • survival

Strategic Organization, Vol. 1, No. 3, 259-300 (2003)
DOI: 10.1177/14761270030013001


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