BRIDGING BEHAVIORAL AND ECONOMIC-THEORIES OF DECLINE - ORGANIZATIONALINERTIA, STRATEGIC COMPETITION, AND CHRONIC FAILURE

This paper is another plea for bridging behavioral and economic approa ches to the study of competition in markets and strategy making by fir ms. The arguments focus on a specific case in point: the behavioral th eory of organizational decline and the economic modeling of immediate exit. The arguments come in three steps. First, the literature on orga nizational decline is reviewed by organizing a framework that summariz es arguments from varying economic and organizational perspectives tha t have, for the most part, developed independently. Observations from empirical and theoretical studies are combined in order to investigate the causes, conditions, courses, and consequences of organizational d ownturn. Second, a theoretical argument is developed that explains vol untary exit and chronic failure by introducing a proxy of organization al inertia in a model of strategic Cournot duopoly. The key assumption s, which have a behavioral flavour that seemingly contradicts orthodox economics, are grounded in the theoretical and empirical literatures. The results of the model support the claim that ''pure profit maximiz ing behavior may be at the expense of organizational survival'' (D'Ave ni 1990, p. 135). Third, by formulating two hypotheses and presenting tentative evidence from the chemical industry, the paper hopes to conv incingly argue that such integrative models lead to empirical testing of interesting hypotheses. A key finding here is that inefficient firm s may outlast their efficient rivals (cf. D'Aveni 1989a).