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Exploring Duopoly Markets with Conjectural Variations

Ludovic Julien, Olivier Musy and Aurélien Saidi ()
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Aurélien Saidi: EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique

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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.

Keywords: conjectural variations; general teaching; Herfindahl Index; Lerner Index; strategic interactions (search for similar items in EconPapers)
Date: 2014
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Published in Journal of Economic Education, Taylor & Francis (Routledge), 2014, 45 (4), pp.330-346. ⟨10.1080/00220485.2014.946545⟩

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DOI: 10.1080/00220485.2014.946545

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