Bayesian Analysis and Duopoly Theory

Abstract

Duopoly theory has a long history in economics and a distinguished list of names associated with that history (Cournot 1897; Frisch 1951; Stackelberg 1952). Nevertheless, the problem has proved to be a frustrating one for economists. The obvious reason for the difficulty is the uncertainty that characterizes the problem. The specific uncertainty revolves around the interrelationship of the two firms and the fact that the decisions of one of them affect the other. Solutions have consisted of finding plausible (or implausible) behavioral assumptions that effectively eliminate the uncertainty. Economists have developed duopoly and oligopoly theory through the years by making different assumptions which produce models explaining some regularity believed to exist in duopoly or oligopoly markets (Bishop 1960).