Effects of Globalization under Consistent Conjectures

Abstract

We study the effects of merging two separate markets each originally monopolized by a producer into a globalized duopoly market. We consider a linear inverse demand with cap price and quadratic cost functions. After globalization, we find the consistent conjectural variations equilibrium (CCVE) of the duopoly game. Unlike in the Cournot equilibrium, a complete symmetry (identical cost functions parameters of both firms) does not imply the strongest coincident profit degradation. For the situation where both agents are low-marginal cost firms, we find that the company with a technical advantage over her rival has a better ratio of the current and previous profits.Moreover, as the rival becomes ever weaker, that is, as the slope of the rival’s marginal cost function increases, the profit ratio improves.