Conjectural Variations and Evolutionary Stability: A Rationale for Consistency

Adopting an evolutionary approach, we explain the conjectural variations firms may hold in duopoly. Given conjectures, firms play the market game rationally. Success in the market game determines fitness in the evolutionary game. Based on linear heterogeneous Cournot and Bertrand competition models, we show that the unique conjectures that are evolutionarily stable are consistent in that they anticipate the rival's behavior correctly.