Behavioural model of firm:

A brief presentation of a simple model by Cyert and March is made to illustrate the decision-making process within a modern large
corporation. The model deals with duopoly, where each firm produces a homogeneous product. As a result, a simple price would prevail in the market and once both firms decide on their outputs, price is determined by the market. It is also assumed that there are no changes in inventories.  

The steps leading to a decision-making of such a firm (as described above) are given below:

1) Rivals reaction: The forecast of  the rivals reaction is made by a straightforward extrapolation of the past observed reactions. 

2) Firm's demand: This is obtained as an estimate of the demand function from the past observations. Future demand is thus an extrapolation of the past sales of the firm.  

3) Cost of the firm: Current cost is assumed to be the same as in the past period. But then if the firm had achieved the project goal in the past periods, then the average unit costs are increased by a certain percentage to allow for slack payments. 

4) Goal specification of the firm: In this model, project is the only goal of the firm. The aspiration level of project is some average of the projects of past periods.

5) Comparison of goals and results: From the information in steps 1-3, a solution is obtained on the level of output, price, cost and projects. The levels of profit ( π ) are then compared with the target level of projects. If the goals are satisfied, then the firm adopts it; otherwise, the firm proceeds to the next step.

6) Re-examination of costs: As costs are directly under the control of the firm, if the goals are not met, firms start re-examining the costs first. It generally involves a cut in slack and other expenses.  

7) Evaluation of the new solution: If the new solution arrived at due to the down-ward adjustment of costs leads to the target project, then that solution is adopted otherwise the firm moves to step 8.

8) Re-examination of demand: This process consists of change in the sales strategy (i.e., more market research, more advertising, more salesman etc.)  

9) Re-evaluation: If the new solution with the revised cost and demand attains target project, then it is adopted, otherwise the firm moves to step 10.

10) Readjustment of aspiration levels: If with the revision of costs and demand, the goal is not met, then the firm opts for a re-adjustment in the aspiration level of the firm (which is project in this model).

The firm has multiple goals, which takes the form of aspiration levels. The firm is satisfier rather than a maximiser. The goals change over time depending on past attainments, aspirations, demands of groups and expectations. The criterion of choice for goal setting is that the alternative selected meets the demands (i.e., the goals) of the coalition. The firm adopts the procedure of sequential consideration of alternatives. The first satisfactory alternative evoked is accepted, when there is failure, the search is intensified.

The organisation seeks to avoid uncertainty. The uncertainty originating from the competitors is avoided by creating a  negotiated environment, that is, by some sort of collusive strategy. 

The firm also uses standard  operating procedures such as task-performance rules, continuous records, and reports, information-building rules, planning devices, budgeting, investment planning and long-run planning. It also uses blue-print-rules-of-thumb for on-costing pricing rules, slack-absorbed-in-cost rules, equipment-expansion rules. The operating procedures and the 'blue-print' rules aim at implementing the goals that help the lower hierarchical levels and act in some way, which is consistent with the goals set by the top management.