A true duopoly is a specific type of oligopoly where only two producers exist in one market. A duopoly is a situation in which two companies own all or nearly all of the market for a given product or service. In reality, this definition is generally used where only two firms have dominant control over a market. In the field of industrial organization, it is the most commonly studied form of oligopoly due to its simplicity.
Duopolies are most effective when the demand for the duopoly’s product is not greatly affected by price. This is also why duopolies are more effective in the short term; over the long term, prices often become more elastic as consumers find substitutes for the product. Also, demand volatility may lead to disagreements within a collusive duopoly regarding outputs and prices.
Duopoly models in economics
There are two principal duopoly models, Cournot duopoly and Bertrand duopoly:
- The Cournot model, which shows that two firms assume each other’s output and treats this as a fixed amount, and produce in their own firm according to this.
- The Bertrand model, in which, in a game of two firms, each one of them will assume that the other will not change prices in response to its price cuts. When both firms use this logic, they will reach Nash equilibrium.
The duopoly market have some characteristics which is alike characteristics of oligopoly market. So the characteristics of duopoly market are as follows:-
- Presence of monopoly element- products are differentiated and each product enjoy some amount of customer loyalty as a result firm enjoy some monopoly power.
- Price rigidity exists in this type of market structure. It means price of product in this market does not change immediately with change in demand and supply in market.
- In this type of market structure either advertising is done to increase its sales volume or by improving quality of its product.
- There is interdependency among firms as no firm can ignore the action and reaction of its rival firm.
- The demand curve is indeterminate, any step taken by rival firm will effect firms product demand.
The most commonly cited duopoly is that between Visa and MasterCard, who between them control a large proportion of the electronic payment processing market. In 2000 they were the defendants in a US Department of Justice antitrust lawsuit. An appeal was upheld in 2004.
Duopoly is a form of oligopoly. In its purest form two firms control all of the market, but in reality the term duopoly is used to describe any market where two firms dominate
There are many examples of duopoly including the following:
- Coca-Cola and Pepsi (soft drinks), Unilever and Proctor & Gamble (detergents)
- Bloomberg and Reuters (Financial information services), Sotheby’s and Christie’s (auctioneers of antiques/paintings)
- Airbus and Boeing (aircraft manufacturers)