Competitiveness and Conjectural Variation in Duopoly Markets

Duopoly competition can take different forms: Bertrand, Cournot, Bertrand-Stackelberg, Cournot-Stackelberg and joint profit maximization. In comparing these market structures this paper make three contributions. First, we find a clear price (output) ranking among these five markets when goods are substitutes (complements). Second, these rankings can be explained by different levels of conjectural variation associated with each market structure. Third, in a more general non-linear duopoly model we find that CV in prices tends to hurt consumers, while CV in quantities is often good for social welfare. In this last case the policy recommendation for regulators seems to be to encourage the establishment of firms’ reputation in quantity responses, but to discourage it in price responses.