CONJECTURAL VARIATIONS AND LOCATION THEORY

ABSTRACT. Imperfectly competitive markets, such as those involving spatial separation of producers and consumers are characterized by interactions between competing firms. Actions call forth reactions and the possible reactions form an important part of the information set that should be used to determine the initial actions. One method for dealing with this is the 'conjectoral variation' approach. Despite some shortcomings this methodology sheds considerable light on decision-making in the space economy. Equally importantly, it sheds light on more general microeconomies modelled as spatial analogs. This paper shows that conjectural variations and the nature of competition between rival firms do indeed 'matter' in location choice and more generally in product design. In particular, we shall be concerned with showing how the conjectured responses of rival firms affect their desire to agglomerate.