An Empirical Conjectural Variation Model of Oligopoly

J. Nellie Liang
Working Paper:

Price conjectural variations are estimated to measure the degree of price competition in a product differentiated oligopoly. The empirical model is a simultaneous equation system of product demand and price reaction functions in which own and cross price elasticities of demand are estimated in conjunction with price conjectural variations. Specifically, the price conjectural variations are estimated directly in the reaction functions, rather than deduced indirectly from profit data. The empirical model is applied to pairs of ready-to-eat breakfast cereal products, using brand data collected during the course of the antitrust case brought by the Federal Trade Commission in the 1970s against Kellogg, General Mills, and General Foods. The empirical results reject competitive brand pricing behavior in favor of independent or interdependent pricing. Further, the hypothesis of a unique consistent conjecture is rejected.