What is a Duopoly?
How Does a Duopoly Work?
There are two kinds of duopolies. 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 is achieved.
In a Bertrand duopoly, the two companies compete on price. Because consumers will purchase the cheaper of two identical products, this leads to a zero-profit price as the two competitors attempt to attract more customers (and thus more profit) through price cuts. The threat of price undercutting means that Bertrand equilibrium prices and profits are generally lower (and quantities higher) than in Cournot duopolies.
Why Does a Duopoly Matter?
A duopoly forces each producer to carefully consider its rival's potential reactions to certain business decisions. When members of a duopoly compete on price, 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 a strong incentive to agree to charge a monopoly price and share the resulting profits. However, federal antitrust laws, most notably the Sherman Act, make collusive activity illegal in the United States. Additionally, each member of a duopoly still has an incentive to compete, even while colluding with the competition. An undetected price adjustment will 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 credit terms, faster delivery, or related free services.
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.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Need a kitchen table, a road bike or an acoustic guitar? You could browse the big box stores and shell out the cash...Read More →
Financial Independence (FI) means having enough income to pay for your expenses for the rest of your life – without relying on a 9-5 job. A financially independent person generally lives on the...Read More →