Conjectural Variation Model Research Articles

On the Equivalence of Ad Valorem Tariffs and Specific Tariffs under Duopoly*

Using a quantity conjectural variation model, this paper examines whether an ad valorem tariff and a specific tariff are equivalent under duopoly. We show that if the average per-unit import tax is the same for the two tariffs, domestic output will be smaller while foreign output will be larger under an ad valorem tariff. We further show that for any value of a specific tariff, there is a Pareto-superior ad valorem tariff for all values of conjectural variation except in the case of perfect competition where the two tariffs are equivalent.

An Econometric Analysis of Brand‐Level Strategic Pricing Between Coca‐Cola Company and PepsiCo.

We investigate market structure and strategic pricing for leading brands sold by Coca‐Cola Company and PepsiCo. in the context of a flexible demand specification (i.e., nonlinear AIDS) and structural price equations. Our flexible and generalized approach does not rely upon the often used ad hoc linear approximations to demand and profit‐maximizing first‐order conditions, and the assumption of Nash‐Bertrand competition. We estimate a conjectural variation model and test for different brand‐level pure strategy games. This approach of modeling market competition using the nonlinear Full Information Maximum Likelihood (FIML) estimation method provides insights into the nature of imperfect competition and the extent of market power. We find no support for a Nash‐Bertrand or Stackelberg Leadership equilibrium in the brand‐level pricing game. Results also provide insights into the unique positioning of PepsiCo.'s Mountain Dew brand.

Biases in Static Oligopoly Models?: Evidence from the California Electricity Market

Estimating market power is often complicated by the lack of reliable measures of marginal cost. Instead, policy-makers often rely on other summary statistics of the market, thought to be correlated with price cost margins - such as concentration ratios or the HHI. In many industries, these summary statistics may be only weakly correlated with deviations from perfectly competitive pricing. Beginning with Gollop and Roberts (1979), a number of empirical studies have allowed the data to identify industry competition and marginal cost levels by estimating the firms' first order condition within a conjectural variations framework. Despite the prevalence of such New Empirical Industrial Organization (NEIO) studies, Corts (1999) illustrates the estimated mark-up levels may be biased, since the estimated conjectural variations model forces the supply relationship to be a ray through the marginal cost intercept, whereas this need not be true in dynamic games. In this paper, we use direct measures of marginal cost for the California electricity market to measure the extent to which estimated mark-ups and marginal costs are biased. Our results suggest that the NEIO technique poorly estimates the level of mark-ups and the sensitivity of marginal cost to cost shifters.

The evolution of consistent conjectures

In this paper we model the evolution of conjectures in an economy consisting of a large number of firms which meet in duopolies. The duopoly game is modelled by the conjectural variation (CV) model. An evolutionary process leads to more profitable conjectures becoming more common (payoff-monotonic dynamics). Under this class of selection dynamics, convergence occurs to a small set of serially undominated strategies containing the consistent conjecture. This set can be made arbitrarily small by appropriate choice of the strategy set. If the game is dominance solvable, then the dynamics converge globally to the unique attractor.

Explaining pricing conduct in a product‐differentiated oligopolistic market: An empirical application of a price conjectural variations model

AbstractA generalized Bertrand‐type model is applied to gain insights on Japanese firms' pricing conduct regarding milk beverages made from fresh milk and reconstituted milk. The empirical results, based on weekly scanner data, indicate the original Bertrand model is inappropriate for our empirical analysis. The estimated model resulted in substantially more elastic own‐price elasticities than previous estimates in Japan based on aggregate market data, supporting the Japanese retailers' contention that fluid milk is a more price‐elastic product than what previous studies had found. Incorporating estimated price conjectures into the model resulted in considerable discrepancies between partial and perceived own‐price elasticities. The result shows that a firm's price conjecture can be an important factor in determining the firm's perceived own‐price elasticity. The estimated conjectural variations were tested to determine whether they represent consistent pricing behavior, and the results indicated that consistent pricing behavior could not be statistically supported. [Econ‐Lit citations: Q110, Q130] © 2002 Wiley Periodicals, Inc.

A dynamic conjectural variations model in the private provision of public goods: a differential game approach

The purpose of this paper is to provide a reasonable microfoundation to justify the concept of a conjectural variations equilibrium which is often used in the literature on private provision of public goods with the help of the differential game. By interpreting the steady state conjectures in a dynamic contribution game as the conjectural variations in the corresponding static game, we derive explicit forms of Nash or non-zero conjectural variations, depending on the choice of the strategy spaces. Furthermore, we find that there may be uncountable many conjectural variations and the possibility of matching behavior (i.e. positive conjectural variations), when non-linear Markov perfect strategies are used and when the domain of a state variable is appropriately restricted.

Conjectural-variation models and supergames with price competition in a differentiated product oligopoly

Conjectural-variation models (CV models) are popular in empirical research as they infer the degree of market power from real data. Theorists of industrial organization, however, disapprove of them 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-maximizing 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 — from Bertrand competition to joint unconstrained monopoly — depending on the degree of product differentiation, market growth, bankruptcy risk, and the discount rate. For the asymmetric-cost case numerical calculations are provided.

Banks as Multioutput Oligopolies: An Empirical Evaluation of the Retail and Corporate Banking Markets

The distinction between retail and corporate banking markets is of much importance in real life banking organizations. The two markets differ with respect to concentration, the importance of informational asymmetries, and the extent of customer mobility. Within a standard conjectural variation model estimated on cost efficient banks as well as on the full sample of banks, the authors empirically characterize the strategic behavior in each of these markets and also focus on cross market interactions to see whether initial moves in one market affect the equilibrium in the other market. They compare their findings to the predictions that would follow from merely considering concentration ratios, such as the Herfindahl index.

Partial Ownership Arrangements and Collusion in the Automobile Industry

This paper develops a conjectural variation model that allows for partial ownership arrangements and foreign trade. This model is applied to the Japanese and US automobile industries. Although collusion is found to occur in the Japanese automobile industry, it is found to be more competitive than the US automobile industry. The effect imports have on firms' price–cost margins in both countries is also found to be different.

Entry and product quality under price regulation

Spence (1975, footnote 5, p. 420) has shown that, in equilibrium, a price-regulated monopoly will supply a socially suboptimal level of quality. This tendency to undersupply quality has been used to justify an expansion of regulatory controls to the quality dimension in certain regulated industries (e.g., electricity and telecommunications). In this paper, we examine the effects of entry on equilibrium product quality in an industry which is price-regulated. A generalized conjectural variation model is used which allows both monopolistic and oligopolistic market structures. Using this model, we find that regulation generally leads to a socially nonoptimal (either too high or too low) level of quality, where the direction of the resulting departure from optimal quality depends upon the conjectures that firms form. Spence's result is obtained as a special case. We then demonstrate that a policy that encourages (or, at least, does not discourage) entry into the regulated market will cause equilibrium quality to move in a social-welfare-improving direction, regardless of the direction of the original distortion.

Strategic management under duopoly

AbstractThe purpose of this paper is to present a general conjectural variation model to provide an integrative treatment of strategic management under duopoly. It is shown that the nature of the desired distortion of managers' incentives depends critically on the magnitudes of the managers' conjectural variations with respect to outputs as well as the owners' conjectural variations with respect to incentives. In particular, it has been demonstrated that when the owners' conjectural variations with respect to incentives are zero, the owners will motivate their managers to maximize profits and provide no incentives for sales under consistent conjectures. However, the owners make their managers behave more (less) aggressively and produce more (less) than profit‐maximizers if the managers' conjectural variations with respect to outputs are larger (smaller) than the actual response.

Partial Ownership Arrangements and the Potential for Collusion

Firms can form partial ownership arrangements by purchasing claims to competitor's profits in order to commit to less aggressive competition. These arrangements can increase profits for all firms in the industry even in the absence of synergies. Using a conjectural variations model, the author shows that, with more than two symmetric firms engaged in quantity competition or with more cooperative conjectures, partial ownership arrangements are never individually rational for all participants. Conversely, with conjectures that lead to more rivalrous equilibria than Cournot, there exist individually rational partial ownership arrangements with any number of firms in the industry. Copyright 1994 by Blackwell Publishing Ltd.

Duopsony models with consistent conjectural variations

In this note we develop a consistent conjectural variation model that generalizes Bresnahan's (1981) results to a duopoly-duopsony setting. This is the first duopsony model in which firms are constrained to have consistent conjectural variations, and two interesting results emerge. First, Bertrand conjectures occur when inputs are homogeneous and when input demand functions are horizontal. Second, the consistent conjectures equilibrium approaches Cournot when input demand functions are vertical or when the firm is a monopolist-monopsonist. This implies that firms will behave more competitively in a duopsony setting as inputs and outputs become more homogeneous and as input demand functions become relatively more elastic.

A conjectural variations model of strategic rivalry in state economic development policy

Using a conjectural variations model of strategic rivalry, the paper examines the implications of regional policies aimed at creating local employment, given that many regions are pursuing the same policies. Among its results is an explanation for the recent, dramatic shift in regional policy emphasis at the local level from traditional locational subsidy scheme to create jobs to policies that use the tax, expenditure, and regulatory authority of government to improve factor markets (primarily labor quality) and enhance the technological capabilities of the regions. The analysis illustrates that while regional locational subsidy competition is not necessarily a zero sum game, a strategy of using local public sector resources to enhance regional competitiveness, under some circumstances, is superior.

A Conjectural Variations Model of Reduced Japanese Milk Price Supports

AbstractConjectural variations are estimated to determine the degree of imperfection in the Japanese milk market. Estimated conjectural variations indicate that the Japanese milk market is imperfectly competitive but is becoming more competitive. Our comparative static analysis indicates that when the milk support price is reduced, the fluid milk price will decline less under the current imperfectly competitive structure than it would under a competitive structure.

The effects of mergers in markets for differentiated products

Several authors have studied conditions in which price-increasing forces associated with mergers in ahomogenous oligopoly might be offset by price-decreasing forces associated with rationalization of production. Analogously, in the case of mergers between producers ofdifferentiated products, economies of scope are a possible price-decreasing force. The interrelationship of demands can be another one. Edgeworth showed the possible strength of this latter force in demonstrating that the imposition of taxes on substitute products can cause the prices of all of them to fall. That paradoxical result is directly relevant since effects of mergers are shown to be equivalent to those of properly chosen taxes. Nevertheless, it is shown that the Edgeworth phenomenon does not carry over to mergers i.e., demand forces on their own are not sufficient for mergers to lead to reductions in all prices — although some price reductions are possible. The paper also develops conditions for all prices to rise after a merger. General conjectural variation models in both price and quantity are considered. Finally, it is shown that mergers cannot increase welfare in linear models with Bertrand or Cournot competition. The implications of the results for merger policy are briefly discussed.

The Output and Profit Effects of Horizontal Joint Ventures

The effects of production joint ventures on their parents' profits and total industry output are analyzed. Using a conjectural variations model, joint ventures that represent new producing entities are shown to be more likely--because the profits of parents in the same industry are more likely to increase--under conditions of cooperative as opposed to rivalrous behavior. Under the same circumstances, industry output increases, although a modest rise in cooperation among firms suffices to reverse these effects. The precise results are shown also to depend upon the degree of coordination of the output decisions of the joint venture and its parents. Copyright 1992 by Blackwell Publishing Ltd.

The inconsistency of consistent conjectures: Coming back to Cournot

Conjectural variation models have been criticized because firms are ‘right for the wrong reasons’, and because possible equilibria are abundant Lately several papers have attempted to meet these difficulties by some condition of consistency or rationality on the conjectural variation This paper shows that stronger versions of such conditions lead into paradoxes, while the weaker forms are of little use in solving the conceived problems The original Cournot assumption actually satisfies consistency enterions The problems with consistent conjectures illuminates fundmental problems with too demanding information assumptions like perfect foresight Such assumptions may create non-trivial structures of self-reference.

Domestic market power and foreign trade: The case of Sweden

This paper develops a conjectural variation model to include foreign trade and applies it to the Swedish industry. The main conclusions emerging from the empirical application are that the degree of implicit collusion is generally very low in Sweden, and further, that while high seller concentration exerts a positive influence on this degree, there is strong and counteracting competitive pressure from foreign trade. A more general conclusion is that it is important to include foreign trade in analyses of market power in open economies.

Turnover costs, unemployment and macroeconomic policies

In this paper we construct an imperfectly competitive macroeconomic model in which firms face turnover costs. The product market is modelled as a conjectural variations model of oligopoly. There is a fixed number of firms in existence, which have power to influence prices in both the goods and labour markets. The resulting ‘high wage’ policies by the firms, by reducing the demand for labour, create involuntary unemployment. We find that expansionary aggregate demand policies can be effective in reducing unemployment. Increases in unemployment benefits reduce employment and have an ambiguous effect on real wages.