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Exploring Duopoly Markets with Conjectural Variations

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  • Ludovic A. Julien
  • Olivier Musy
  • Aurélien W. Saïdi

Abstract

In this article, the authors investigate competitive firm behaviors in a two-firm environment assuming linear cost and demand functions. By introducing conjectural variations, they capture the different market structures as specific configurations of a more general model. Conjectural variations are based on the assumption that each firm believes its own strategy influences its rival's strategy. Firms derive their optimal choice from these exogenous conjectures, under the form of a conjectural best-response function. The authors' approach fully encompasses the standard measures of market power (the Lerner Index) and concentration (the Herfindahl Index), both depending on the conjectural variations. They finally represent, analytically and graphically, the equilibrium strategies and the associated indexes in a unified framework for any level of competition, ranging from perfect competition to collusion.

Suggested Citation

  • Ludovic A. Julien & Olivier Musy & Aurélien W. Saïdi, 2014. "Exploring Duopoly Markets with Conjectural Variations," The Journal of Economic Education, Taylor & Francis Journals, vol. 45(4), pages 330-346, December.
    • Handle: RePEc:taf:jeduce:v:45:y:2014:i:4:p:330-346
    DOI: 10.1080/00220485.2014.946545
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    7. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-122, February.
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