Duopoly

What is a Duopoly?

A duopoly is a market structure where two firms dominate the market. The word comes from the Greek Duo “two” and Polein, “to sell.”

These two firms account for a significant share of the total market production and sales. Think about Coca-Cola and Pepsico, which dominate the soft drink industry. The two firms act as monopolies.

In contrast to a free market economy, the duopolistic firms’ dominance in the market results in reduced competition, higher prices, and decreased innovation.

Imagine your friend came over to play video games, and your little brother also wants to play video games, but you give him a controller that is not plugged in.

In theory, the three of you are pushing the buttons, but you and your friend are the only ones playing video games. In this type of market, the presence of only two producers serves to increase their bargaining power over a large number of buyers.

The high degree of interdependence between the two companies means that their strategic actions and decisions can significantly impact one another.

This interdependence can also lead to a high likelihood of collusive behavior as both firms look to secure high market profits. However, regulators often keep a close watch on duopolies to prevent anti-competitive practices, meaning that the companies may not be able to collude.

The duopoly market structure also provides significant monopoly power to the two companies.

In addition to controlling the market supply, the firms may adopt a differentiation strategy, leading to strong brand loyalty among customers and further strengthening their monopoly power.

Entering a duopoly market can be challenging due to high entry barriers, which may stem from economies of scale inherent in the market or low-price strategies and brand loyalty established by the existing firms.

Nevertheless, the high sales of each company due to the split market can result in substantial economies of scale.

Advantages of duopoly

Duopolies offer certain advantages to the markets but also contribute to disadvantages. So let’s take a look at their advantages and disadvantages.

The advantages are:

1. Increased efficiency and lower costs
They bring increased efficiency and lower costs compared to a competitive market. In addition, the two companies benefit from economies of scale and scope. Thus, reducing costs and improving the production processes. 

A duopoly can lead to higher investment in research and development, as the two firms have the funding to improve their services and products. 

2. Stable Market
Another advantage is that it can lead to a stable market with lower volatility and reduced risk for both firms and consumers. The two companies are less likely to engage in price wars or other behaviors that can disrupt the market.

3. Monopoly Power'
The dominant position of duopoly firms allows them to exert significant control over market prices and conditions, maximizing profits and maintaining market dominance.

Disadvantages Of Duopoly

The disadvantages of duopoly are as follows:

1. Higher prices
Duopolies have higher prices for consumers due to reduced market competition. In addition, it may give the firms the power to control the market price.

2. Less innovation
A lack of competition limits innovation and progress. There is a lesser incentive to invest in new products or services that may disrupt their market position. Think about how mobile device designs have stayed the same over the last few years.

3. No new competition
Duopolies may also reduce consumer choice as only two firms are available in the market, which can harm consumers and limit competition. In addition, the entry barriers can make it difficult for new competitors in the market to enter.

Types of Duopolies

The two most common types are the Cournot and Bertrand duopolies, even though there are other types in the market.

These two models explain how companies may engage in a duopolistic competition. 

For example, one model suggests that companies consider the quantity supplied by their competitor. The other model proposes that companies never reach profit due to an engagement in price wars.

1. Cournot duopoly

It is named after French philosopher and mathematician Antoine Augustin Cournot, who first described the concept in 1838.

In this variation, two companies compete on the quantity of a homogeneous product they produce. Both companies consider the quantity produced by the other competitor.

The total quantity supplied by both companies determines the market price, leading to an outcome called the Cournot Equilibrium. 

The firms are not in communication or cooperation with one another. This model focuses on the quantity and not the price.

2. Bertrand duopoly

After analyzing Antoine Cournot's work, Joseph Louis François Bertrand revised the Cournot model. He discovered that Cournot's conclusion in his book was incorrect. 

Instead of adjusting the quantity supplied, Bertrand concluded that duopolistic firms compete by changing their product prices. In a perfectly competitive market, the firms set prices equal to the marginal cost, resulting in no economic profit.

Examples of Duopolies

In everyday life, we see duopolistic competition from when you drink your orange juice to the plane you fly. Some examples are Microsoft and Apple; these companies have majority control in the personal computer operating system market.

Let's look at other examples:

1. Visa and Mastercard

If you have a debit or credit card, chances are that a Visa or Mastercard logo is on your card. That is how impactful these two companies have become.

The companies have a strong presence globally in cashless payments. In addition, the rise of online shopping and the COVID-19 pandemic have propelled their business to grow further.

Visa and Mastercard are facing an increase in regulatory scrutiny. The Credit Card Competition Act (CCCA) has been implemented to increase competition in the industry. Banks are required to offer cards with at least two other card competitors.

Besides legal scrutiny, both companies may have to face new market participants. However, coming by the hand of Fintechs, these companies could remove the middleman between consumer and bank.

Fintech companies are emerging as potential disruptors. By removing the traditional intermediaries between consumers and banks, these fintech companies could challenge the existing Visa and Mastercard duopoly and offer new and innovative solutions.

2. Coca-Cola and PepsiCo

Coca-Cola and PepsiCo are considered a duopoly in the carbonated soft drink market. This is because Coca-Cola and Pepsi are the companies' flagship products, but you may need to be made aware that these companies are behind other familiar household products.

For example, Dasani and Aquafina or Powerade and Gatorade. Their portfolios offer various beverages, including sports, tea, flavored water, energy, plant-based, and juice drinks.

This duopolistic structure has remained stable over time, as both companies have invested a lot of resources into maintaining their position in the market.

Furthermore, the entry barriers for their market are very high, their products are well known to the public, and they possess excellent brand awareness.

3. Intel and AMD

Microprocessors are essential for our daily lives, from powering our computers to servers we use for the internet. In addition, it has played a significant role in the globalization process. Intel has been the king of the microprocessor market for many years, with its sound being synonymous with computing.

However, in recent times, AMD has been making significant strides and capturing a larger market share. As a result, the competition between Intel and AMD has intensified, and now a more significant proportion of computers feature a processor from either of these companies.

It's worth mentioning that this duopoly is not absolute. For example, apple has started producing chips for personal computers, ending its partnership with Intel.

This shift indicates that duopolies can be disrupted, and new competition can emerge, potentially leading to improved consumer products and services. However, it also highlights the potential challenges and obstacles companies face trying to break into a duopoly market.

4. Boeing and Airbus

If you're unfamiliar with aviation, you may need to know which air manufacturing company you're flying with. 

However, it's important to note that Boeing and Airbus dominate the commercial aircraft manufacturing sector. Interestingly, these two powerhouses have their headquarters in different continents, with Boeing being based in the United States and Airbus headquartered in Europe. 

With a long history in the aerospace industry, Boeing has established itself as a leader in the field, while Airbus was founded to compete with them.

5. Google and Facebook

In the online marketing business, there are two major players you can choose from to market your business. Google and Facebook are the goliaths in online marketing.

These companies have significant reach, data, and technology, giving them an advantage over other market participants. Their presence is more significant during slow economic times, as people and companies prefer to use their platforms due to their reach.

This market is ever-changing, rolling out an update giving users a choice if they want their data to be collected. Therefore, making it more difficult for companies to target individuals based on their data.

Duopoly Vs. Duopsony

Duopoly Vs. Monopoly

Is Duopoly Oligopoly

A duopoly is a specific type of oligopoly. Here are the key points:

• Definition: A duopoly is a market structure with two dominant firms controlling the majority of the market share.

• Type of Oligopoly: Oligopoly refers to a market structure where a small number of firms dominate the market. A duopoly is a subtype of oligopoly characterized by the presence of two firms.

• Competition: In a duopoly, competition is between the two firms, which can significantly impact pricing, output, and market dynamics.

• Interdependence: Firms in a duopoly are highly interdependent, meaning their strategic decisions and actions influence each other.

• Examples: Examples of duopolies include Coca-Cola and PepsiCo in the soft drink industry, or Boeing and Airbus in the aircraft manufacturing industry.

Conclusion

Duopolies represent a significant market structure characterized by the dominance of two firms, which often wield substantial market power and influence.

While they can bring about efficiencies through economies of scale and scope, they also pose challenges such as reduced competition, higher prices for consumers, and limited innovation.

The interdependence between the duopolistic firms can lead to strategic behaviors and even collusion, prompting regulatory scrutiny to ensure fair competition and consumer welfare.

In industries ranging from technology to consumer goods and aerospace, duopolies are a common phenomenon, shaping market dynamics and consumer experiences.

While they may present challenges, they also provide opportunities for companies to differentiate themselves, innovate, and deliver value to consumers.

The balance between market efficiency and competition remains crucial in ensuring vibrant and inclusive markets that benefit both businesses and consumers alike.

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Business Cycle
• Cross-Price Elasticity
• Development Economics
• Economic Growth Rate
• Marginal Analysis