What is Duopoly and the significance of duopoly?

What is a Duopoly?

A Duopoly is s type of oligopoly where two institutions or corporations, producing similar goods and services, dominate or have exclusive control over a certain market. The companies in a duopoly tend to compete with each other, reducing the change of a monopoly market.

A duopoly has the same impact on the market as a monopoly if the two companies collide on prices or output. Collusion results in paying higher prices as compared to a competitive market, and collusion is illegal in the US under antitrust law.

Visa and Mastercard are examples of a duopoly market where they both dominate the payment industry all over the world.

 

Table of Contents

  1. What is a Duopoly?
  2. Difference between Duopoly and Oligopoly
  3. Significance of a Duopoly
  4. Examples in Business, Products and service
  5. Bertrand Duopoly and Equilibrium
  6. Cournot Model
  7. Pros and cons of Duopolies

Difference between Duopoly and Oligopoly

  • Oligopoly is where there are few sellers, the term few is what is not defined in oligopoly. The number of players in the marked depends on the business area itself.
  • Oligopoly examples include- car manufacturers, steel manufacturing, airline companies etc. The feature is few players. Compared to monopolistic or perfect competition where there are n number of players
  • Duo -poly means exactly two players, selling almost the same product. For eg Pepsi and coke, Visa and Master card , Airbus and boeing. So there are only two players that’s it.

Significance of a Duopoly

 Duopolies play a crucial role in the market as they force the other company to consider how its actions will affect its rivals. This affects how each company operates, how it produces its goods and provides services, how it runs its advertising campaigns, etc.

This ultimately affects how and at what price the goods and services are offered. For this reason, most duopolistic firms find it profitable and usually necessary to agree to form a sort of monopoly where both firms take one half of the market space and consequently, one-half of the market’s profits.

This however is a tricky strategy. If done incorrectly, due to the antitrust laws in the United States, this will be considered as collusion which is illegal.

Examples of Duopoly

  • Airbus and Boeing
  • Google and apple in the mobile operating system market
  • Google and facebook with Instagram combined- in online marketing
  • Pepsico and Coca cola in aerated drinks
  • Visa and master card in payment systems for cards
  • Razory pay and Bill desk in payments gateway in India
  • NSE & BSE in stock exchanges in India

Bertrand Duopoly and Equilibrium

 To understand this you need to know the nash equibrium, which states that even if two companies are there in a market. They will never come together and collude even if it benefits them.

It states that if two criminals are arrested and each held in solitary rooms without no communication. Now at this stage, none of the prosecutors have any evidence to prosecute any of them prisoners.

So they give each one of them an opportunity to confess. Remember this important point that

  • If both of them don’t confess then both would gain and be let out
  • And if either of them confesses then the other suffers

What Nash equilibrium says is that in this case both would betray each other and lose out instead.

Bertrand Duopoly applies this in terms of pricing in Duopoly in a similar manner

  • If both increase prices beyond marginal cost then both benefit
  • If one of them decreases, then then other loses out
  • Hence there would no equilibrium reached

Cournot Model

This is actually an interesting observation and at the same time very true in practice. It is relevant for duopoly because, both the firms try to estimate the demand & output they produce.

This practice by the way is carried out independently!

Usually you can see this happening in product and marketing plans, where product managers would try to estimate the market size. Also the estimate is taken as given or fact, under which they again assume the demand too.

In the process they try to assume, what is left is for them to grab it out. In turn behaving like a monopoly firm.

Pros and Cons of Duopolies

Duopolies can have positive as well as negative effects on the companies and market. The pros and cons of Duopoly are mentioned as follows:

Pros Cons
The two companies can benefit by cooperating to improve profits Duopolies restrict market trading
Companies do not innovate to compete in the market New companies are restricted from entering the market
Prices may be controlled by the competition between the two companies. The respective sector lacks innovation
  Consumers have limited options and price hiking, and collusion may occur
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Sarthak Bhalerao

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