This article discusses two leading theoretical approaches to understanding how firms operate in markets and the functioning of their internal organizations. Game theory is a microanalytic approach that offers a useful framework for organizing thinking about the factors that influence firm strategic conduct vis-a-vis its competitors. Agency theory is mainly concerned with market mechanisms, such as an executive labor market or market for corporate control, that may discipline firm management in the absence of ownership control. Both approaches can yield useful hypotheses for empirical testing of factors affecting industry and firm performance.
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