Do Other Firms Matter in Oligopolies?



This paper examines how firms interact with their rivals. The main novelty of our approach is that we let conjectural variations depend on the actual ability of other firms to react, which we measure by both the physical capacity and financial status of firms. Our main findings are twofold. First, physical and financial capacity significantly affect conjectures. Second, we recover the implied conjectural variations and reject homogeneous conjectures. We generally find that leaders expect aggressive responses, and followers are Cournot players.