Oligopoly Behavior When Conjectural Variations are Rational

Abstract

This paper considers the following question: if each firm in an n-firm oligopoly has "rational conjectural variations," if n is exogenously given, and if we rule out increasing returns to scale, must aggregative industry output and its market price converge to competitive levels as n diverges to infinity? By rational conjectural variations we mean that at equilibrium, the responses from its rivals which each firm believes will follow a change in its output must correspond to reactions the rivals themselves perceive to be profit maximizing. In this framework we show that the answer to our question is "no"--market outcomes near the cartel level and near the competitive level can both result no matter how large n is.