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Conjectural Variation Models and Supergames with Price-Competition in a Differentiated Product Oligopoly

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  • Pfaffermayer, M.
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    Abstract

    Conjectural variation models are popular in empirical research as they infer the degree of market power from real data. IO-theorists, however, disapprove it for lack of theoretical foundation, arguing that dynamic reactions are forced into a static model with the strategy space and time horizon only loosely defined. The presented model follows an idea put forward by Cabral (1995) and demonstrates that the CV-model can be interpreted as the joint profit maximising steady state reduced form of a price setting supergame in a differentiated product market under optimal punishment strategies. For the symmetric two firm case the CV-parameter is shown to cover the full range of possible outcomes depending on product differentiation, market growth, bankruptcy risk and the discount rate.

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    Bibliographic Info

    Paper provided by School of Economics, University of East Anglia, Norwich, UK. in its series University of East Anglia Discussion Papers in Economics with number 9704.

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    Length: 23 pages
    Date of creation: 1997
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    Handle: RePEc:uea:papers:9704

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    Postal: Helen Chapman, School of Economics, University of East Anglia, Norwich Research Park, Norwich, NR4 7TJ, UK
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    Keywords: OLIGOPOLIES ; PRICING;

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