What it is:
The term is named after John Nash, who is an American mathematician who won the Nobel Prize in Economics in 1994. The film A Beautiful Mind chronicles his life and struggles.
How it works (Example):
A oligopoly occurring when two companies (or countries) control all or most of the for a product or service.is a form of
There are two kinds of duopoly. In the first, the Cournot duopoly, competition between the two companies is based on the quantity of products supplied. The duopoly members essentially agree to split the market. The price each company receives for the product is based on the quantity of items produced, and the two companies react to each other's production changes until an equilibrium (called the Nash equilibrium) is achieved.
Nash equilibria do not occur in a Bertrand duopoly, in which two companies compete on price. Because consumers
Why it Matters:
The Nash equilibrium is actually a game theory that states no player can increase his or her payoff by choosing a different action given the other player's actions. In , a 's small production base means that each producer must carefully consider its rival's potential reactions to certain business decisions. As with most oligopolies, when members of a duopoly compete on price, for example, they tend to drive the product's price down to the cost of production, thereby lowering profits for both members of the duopoly.
These circumstances give duopolists strong incentive to agree to charge a terms, faster delivery or related free services.price and share the resulting profits. However, federal laws, most notably the Sherman Act, make collusive activity illegal in the United States. Additionally, each member of a duopoly still has incentive to compete, even while colluding with the competition: An undetected price cut (or increase in production) attract customers who are buying from the competition and customers who are not buying the product at all. Price adjustments may be subtle, including better
Duopolies are most effective when the demand for the duopoly's product is not very affected by price. This is why duopolies are more effective in the short term; over the long term, prices often become elastic as consumers find cheaper substitutes for the product. Also, demand volatility may lead to disagreements within a collusive duopoly regarding outputs and prices.