Strategic Investment with Consistent Conjectures

Huw Dixon

Oxford Economic Papers, 1986, vol. 38, issue 0, 111-28

Abstract: This pape r combines two ideas in oligopoly theory: models of strategic investment and T. Bresnehan's_(1981) concept of consistency of conjectures. Firms precommit capita l stocks and hencedetermine their short-run cost function. The degree of compet ition in the product market is made endogenous by imposing Bresnehan's consisten cy condition. Firms take into account the influence of their investment decision on the degree of competition in the productmarket. The equilibrium conjecture of firms will lie between the Cournot and Bertrand values. In general there will be factor bias and inefficiency in production, which in a symmetric equilibrium is one of undercapitalisation. The degree of competition is sensitive tothe wa ge-rental ratio: for high wage-rental ratios the equilibrium conjecture will be nearly Bertrand, and for low ratios they will be Cournot. Copyright 1986 by Royal Economic Society.

Date: 1986
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