Duopoly

What is a Duopoly?

A duopoly is a form of oligopoly where there are only two companies that dominate the market. Two major companies operate in the market and produce similar goods and services. There might be other companies as well in the same space. However, only two major players are holding the maximum market share. The way two major companies set the pricing and standard of their offerings shapes the market in which they operate.

In Duopoly, two major companies will compete with each other, which affects the pricing of the products manufactured.

What are the types of duopoly market?

There are five different types of duopoly market. These are:

The Cournot Duopoly:

The Cournot Duopoly model was designed by French economist Augustin Cournot in 1838. As per the Cournot model, each company in a duopoly market received price value on goods and services depending on the quantity or the availability of the goods and services. These two major companies maintain a reactionary relationship related to the market price. Each of the two companies makes modifications in terms of respective production until an equilibrium position is met in the form of equal halves of the market for each firm.

The Bertrand Duopoly:

Bertrand was a French mathematician who developed the model of a duopoly in 1883. Bertrand's model differs from Cournot's model in terms of behavioural assumption.

Bertrand's model focuses on price competition. The Cournot Duopoly model and the Bertrand model's primary difference is that the Cournot model believed production quantity would help drive the competition. In contrast, the Bertrand model believed that competition is driven by price.

As per Bertrand's theory, when the customers are given an option to choose between equal or similar goods and services, they would go for that company that is offering the best price. This would result in a price war and resulting in huge losses.

Chamberlin’s Duopoly model:

Chamberlin’s model of duopoly highlights the interdependence of two major players in a duopoly. Chamberlin claims that oligopoly firms do learn from previous experiences in the real world. However, his theory assumes homogeneous products, equal size firms, identical costs, no further competition by entry of new firms and having complete knowledge of demand.

Stackelberg duopoly:

Stackelberg duopoly or Stackelberg competition is a perfect model centered around a non-cooperative game. This model was developed by Heinrich Stackelbelrg in 1934 in his Market Structure and Equilibrium and represented a breaking point in the study of the market structure, especially while analysing duopolies. The model prepared by Heinrich Stackelbelrg was based on the assumption and conclusion of Bertrand and Cournot Duopoly model.

In game theory, the Stackelberg duopoly is a sequential game. In the Stackelberg duopoly, two firms sell homogenous products and are subject to the same demand and cost function. One of the two firms has greater brand equity and is in a better position to decide the quantity to sell. Based on the decision taken by this firm, the second firm observes and determine the production quality.

Hence, to find the Nash equilibrium, backward induction is used to analyse the second firm's behaviour.

Edgeworth Duopoly model:

Francis Y Edgeworth developed the Edgeworth Duopoly model in his work, 'The Pure Theory of Monopoly' in 1897. This model is based on a similar concept to Bertrand's model. However, there is a slight difference as it includes another constraint in the firms' production capacity.

In this market structure, the firms have two possible options, either to collude or not collude. In case the firms decide to collude, the firms will split and share the market and the production of the good.

However, collusion is not feasible in most cases, as firms have reasons to break cooperation to get improved profits. Hence, one of the two firms decides to lower the price and increase production to gain market share from its competitor. In turn, the other firm would follow the same. The process would continue as long as both firms achieve maximum production.

What are the different characteristics of Duopoly?

Duopoly is a special case of oligopoly that has two sellers. Below are some of the features of this market.

• In a duopoly market, two producers in the market serve many buyers. Hence, they have high bargaining power.
• The producers in the market have high strategic dependence. It means that these companies' strategic actions and decisions could have a considerable impact on its competitor.
• In a duopoly market, there are chances that the producers may join together to decide on pricing as they are highly interdependent to obtain improved market profit.
• In case the two producers in the market do not collude, you might see strong competition between them. In such a case, the regulators have to pitch in to avoid any anti-competitive practices.
• It is also possible to see the two companies in the duopoly market adopts a differentiation strategy. As long as the two companies adopt this strategy, each product would have numerous loyal customers and present significant monopoly power.
• The entry barrier in the duopoly market is very high.
• Each of the two companies in a duopoly market enjoys massive sales as majorly two players dominate the market.

Advantage and Disadvantages of a Duopoly

Advantages of Duopoly:

• As there are few significant competitors, the firms can make huge profits. This is because the customers have either of the firms to choose from.
• The market is simpler for the customers as they do not have to hunt for multiple options to choose the best product and services they need.
• Changes can be brought in terms of refining the quality of the existing product and services offered to the customers instead of creating a new product to become more competitive.
• Companies compete strategically in the market to generate higher profits.
• Each company rely on the other's decision in terms of price and production. Thus, they are mutually dependent on each other to optimise the profits.
• Because of the competition between the firms, the customers are benefitted as the monopoly price gets removed.

Disadvantages of Duopoly:

• As the companies are interdependent, there is an impact on the free trade options between the companies.
• In a duopoly market, there is a lack of a diversified supply of goods and services, which needs a huge amount of capital.
• In order to control the quality of the goods and services offered and settle the maximum prices to the public, sometimes the States are required to intervene.

Some Examples of Duopoly:

• Visa and Mastercard hold almost 90% of the international payment service business. While Visa holds almost 60% market share, Mastercard has access to 30% of the credit and debit card market.
• Coca Cola and Pepsi hold more than 70% of the carbonated drink market, with Coca-Cola leading the market, followed by PepsiCo.