What is Duopoly? Examples, Characteristics and Types

A duopoly is a commercial arrangement in which two competing enterprises share the same market. In this market, two brands can work together to establish pricing or quantities, causing buyers to spend more money. A duopoly, like any other market structure, has a substantial influence on how enterprises interact with one another. 

 

Because there are only two participants in the market, the actions of one will influence the production and activity of the other. They also have an impact on how a firm runs, as well as how it manufactures and markets its products.

 

In this post, we'll look at the characteristics of a duopoly, its benefits and drawbacks, and how to tell the difference between a duopoly and an oligopoly. Then, we'll go through the many sorts and examples of duopolies.

 

 

Examples of Duopoly

 

To properly comprehend some marketing terminology, it might be quite beneficial to study multiple instances. As a result, we'll now look at six huge corporations that are great instances of duopolies.

 

1. Visa and Mastercard

 

The two well-known payment service enterprises are an excellent illustration of a duopoly. They control over 80% of all card transactions in the European Union. It goes without saying that both companies have great pricing power and are resistant to payment newbies.

 

2. Coca-Cola and Pepsi

 

The large businesses most known for their carbonated beverages are the epitome of a duopoly. According to Statista, Coca-Cola’s market share in 2019 was 43.7 per cent. At the same time, Pepsi had a market share of 24.1 per cent.

 

3. Boeing and Airbus

 

Airbus and Boeing have a monopoly on the aeroplane manufacturing market. The rivalry among the world's leading aircraft manufacturers is strong.

 

In many of the preceding cases, the competition comprises multiple players. However, because two firms stood out and had a considerable market share, we may classify them as a duopoly. Furthermore, smaller firms typically target a specialised market or just serve the domestic market.

 

(Related blog - Perfect and Imperfect Competition)

 

 

Competition Implications of Duopoly

 

Every business in a duopoly market is strategically dependent on the other. It has an impact on how individual businesses function, how they manufacture items, how they promote products, and how they set prices. The outcomes of the competition are determined by the methods employed by each organisation.

 

Both of them might use a pricing technique similar to the Bertrand model. Alternatively, both of them may employ a quantity-based competing approach. Furthermore, unlike the previous two models, the corporation may use collusive or differentiating methods to increase profits.

 

1. Price competition exists

 

When two companies fight on price, it can lead to higher prices wars, especially when the products are similar. Because of the uniformity, the goods of each firm completely substitute one another. As a result, the consumer's primary priority in purchasing is a reduced price. They have no motive to favour or be loyal to a certain product over the other.

 

When one company reduces its price, it reduces a competitor's share of the market because customers switch. Competitors will drop their prices as well, so as not to lose market share. Price wars emerge and persist until prices equal marginal cost, hence diminishing profit potential.

 

2. Competition based on quantity

 

When the foundation of competition is volume rather than price, duopolies perform better. Each firm splits the market and profits. As in the Cournot model, when it reaches the optimum, production and prices stabilise.

 

Profits for each firm will be substantial as well. Both businesses can charge a price that is more than the marginal cost that is above the perfectly competitive price (while still operating in a monopolistic market). In other words, they both have a monopoly.

 

3. Quality-based competition

 

In a duopoly market, performance is another degree of rivalry. To foster loyalty, each organisation differentiates its offers. Differentiation creates a monopolistic situation in the market. Each product will have a devoted following, boosting the company's monopolistic power.

 

(Check out - Marginal Utility Theory)

 

Duopoly VS Oligopoly

 

Both duopolies and oligopolies erect significant entry barriers, making it hard for new businesses to enter. Because the competition is limited, they are also comparable in terms of the power and authority their players wield. 

 

Furthermore, enterprises within these market frameworks choose collaboration over rivalry to maximise profits. After all, the number of businesses is restricted, so clients have few options.

 

A duopoly and an oligopoly, on the other hand, exhibit a wide range of enterprises in respective marketplaces. In an oligopoly, there are a few firms (two or more), but in a duopoly, the number of participants is always restricted to two, and the market is split in half. 

 

Firms in a duopoly have monopolistic power and their tactics are intertwined. The decision of one corporation will undoubtedly impact the decision of the other.

 

 

Characteristics of Duopoly

 

There are two producers on the market. Because both producers serve a large number of customers, their bargaining power is strong.

 

1. Producers are highly strategically dependent. One company's strategic activities and decisions have a big influence on its opponent.

 

2. The likelihood of collusive conduct is high. Because they are so intertwined, they are likely to work together to obtain big market gains.

 

3. The competition might be tough. This occurs when the two do not work together. To avoid anti-competitive practices, regulators normally maintain a tight check on this market. As a result of the rigorous oversight of regulators, the two cannot cooperate.

 

4. Duopoly power has a tremendous impact. In addition to controlling market supply, the two corporations may pursue a differentiation strategy. As long as each product employs a differentiation strategy, each product will have a large number of committed clients, resulting in enormous monopolistic power.

 

5. The hurdles to entry are substantial. It can be caused by structural obstacles inherent in market features such as economies of scale. Alternatively, both corporations have purposefully erected entry obstacles such as low-price initiatives and brand loyalty.

 

6. There are significant economies of scale. Because the market was dominated by only two businesses, both achieved strong sales.

 

(Recommended blog - Experimental Economics)

 

 

Types of Duopoly

 

1. Cournot duopoly

 

The production of created products and services, according to this duopoly, determines rivalry between players. Businesses in this market system produce a set number of items in order to maximise their earnings. 

 

Furthermore, enterprises must bargain in order to split the market. Companies establish steady prices of goods and services in the long run. This kind also rules out the possibility of collusion.

 

2. Bertrand duopoly

 

Prices affect the type of rivalry between enterprises in this market setting. Customers choosing the businesses with the lowest prices might lead to a price war and intense rivalry among players. As a result, companies pursue low-priced tactics and lose profit while customers love acquiring items or services at ridiculously low costs.

 

 

4 Types of Duopoly Models

 

The ambiguity in a firm's pattern of behaviour under oligopoly caused by their unexpected action and reaction makes systematic oligopoly analysis challenging. Classical and contemporary economists, on the other hand, have produced a number of models based on distinct behavioural assumptions.

 

---

Duopoly Models

---

These models are widely categorised into two types: (I) traditional duopoly models and (II) current oligopoly models. Duopoly Models occur when there are only two vendors of a product.

 

1. Cournot's Duopoly Model

 

In 1838, Augustin Cournot, a French economist, developed the first formalized duopoly model. Cournot has determined that each vendor finally supplies one-third of the marketplace and pays the same price based on this approach. While one-third of the market is still under-supplied.

 

2. A Small Group Model of Chamberlin's Duopoly

 

If enterprises in such a market are interdependent, Chamberlin's model of duopoly acknowledges it. Chamberlin contends that in the actual world of oligopoly enterprises are not so inbred that they do not learn from prior experience. 

 

He does, however, make the same premises as proponents of old classical models. In other words, his model is likewise based on the premise of homogenous goods, businesses of the same size with comparable costs, no new company entrance, and complete demand knowledge.

 

3. The Duopoly Model of Bertrand

 

In 1883, Bertrand, a French mathematician, created his own duopoly model. The behavioural assumption of Bertrand's model varies from that of Cournot's model. While in Cournot's model, each seller believes his rival's production stays unchanged, in Bertrand's prototype, each seller bases his pricing on his rival's price, instead of his production.

 

4. Edgeworth's Duopoly Model

 

In 1897, Edgeworth devised his duopoly model. Edgeworth's model is based on Bertrand's premise that each seller believes his rival's price, rather than his output, would remain constant. 

 

To summarise, firms in a duopoly are either rivals or colluding partners. Everything is dependent on the circumstances. Fixed pricing, price wars, and limited consumer options are all part of the market system.

 

(Suggested Read - What is Deflation?)

 

Consider the smartphone software markets of Android and iOS. Google created Android in order to control the mass market. Similarly, Apple's iOS is aiming for and monopolising a more premium market.

 

To summarise, firms in a duopoly are either rivals or colluding partners. Everything is dependent on the circumstances. Fixed pricing, price wars, and limited consumer options are all part of the market system.