Duopoly refers to a market situation wherein there are two sellers that go on to own all or possess nearly all of the entire market share for the product or service.
Types of Duopoly
The following are the two types of duopoly.
#1 – Cournot Duopoly
Under this Cournot Duopoly model, it is assumed that the players would make an arrangement to divide the market into half and then share it. Emphasis is laid on the number of goods that are produced indicating that this is what would shape the competition between the 2 firms.
#2 – Bertrand Duopoly
Cournot believed that it was the quantity that would drive the competition between the 2 companies whereas Bertrand would always go on to believe that it would be the price. Consumers would always choose the company that offers a lower price.
Examples of Duopoly
Given below are some of the different business sectors and the associated companies that have established themselves as duopoly players in the particular vertical.
Advantages of Duopoly
Given below is how duopoly is advantageous to the business.
#1 – Close Competition Promotes Efficiency
In contrast to a monopoly business wherein a single player happens to dominate the market and enjoy the maximum market share leaving consumers with little or no choice in having to select between better products, forms of competition such as duopoly tend to end this practice and bring about better choice to customers. One player tends to be better than the other.
One small mistake, a wrong decision, or a delay in the adoption of certain trends or updated practices can cause huge losses. With duopoly, with every player trying to be better than the other, there is competition at every phase, be it innovative products at services or even a wide range of products at lower prices, there develops a certain efficiency in the business and consumers too stand to gain out of it.
#2 – Maximum Profits for Firms
Owing to very little competition, there is scope for the participating players to extract the maximum profits from the products that they happen to sell. Firms will be in a position to generate significantly higher profits for themselves. Consumers would end up choosing either one of the 2 companies and hence there exists for them the opportunity to be an undisputed market leader and thereby tend to churn out maximum profits by having to sell their products and services.
#3 – Simplicity for Consumers
The markets tend to be simpler for consumers as they do not have to put their time and energy in having to choose between multiple products of different brands by making the necessary research and comparison. They are very well aware of the top 2 players in the vertical and end up buying from either one of them. They need not take trouble in having to search among many other options to thereby choose the best product or the service that would go on to satisfy their needs.
#4 – Enhanced Power of Firms
It so often happens that there are high barriers to entry and thus firms may have an induction to enhance and make use and exploit their power to the maximum use, thereby extracting maximum profits in the market. Small firms may find it really difficult to enter the market. Hence from the point of view of the bigger firms, duopoly stands as an excellent opportunity for them to have strong market power and establish themselves.
Disadvantages of Duopoly
Given below are pointers as to how duopoly tends to have certain disadvantages.
#1 – Difficulty for Smaller Firms
More often than not, owing to high barriers of entry, smaller firms find it difficult to enter the market. They would stand no chance against the big majors that would currently be dominating the market. Hence the smaller firms would tend to have no choice but go on to unwind themselves, in the long run, owing to stiff competition in the market.
Hence duopoly happens to be a threat to smaller firms and for any new incumbent or enthusiastic entrepreneur who tends to make an attempt to enter such markets. The strong foothold naturally discourages competition for other members in the market.
#2 – Lack of Options for Consumers
No doubt that there are simplicity and consumers have not much difficulty in choosing the products. However, consumers have no choice but to accept either one of the 2 brands that are available. There exists a dearth of options for consumers to choose from. There may be a latent need of the consumer that the existing brands fail to notice and fulfill thereby leaving the consumers with no choice but just accept the products that the duopoly players have to offer in the market.
#3 – Possibility of Collusion
In the case of duopoly, sometimes the market players may happen to end up colluding to their advantage. Collusion is an act by the participants to disrupt the market equilibrium to their advantage. They act in secret agreement by so often deceiving and also defrauding others so that they can maintain their market share. They may in synchronization try to increase the prices of the products they sell so that they can take the maximum profits out of such actions. Consumers are at a loss and so are new small firms that intend to enter the market as their possibility of survival is greatly reduced.
Duopoly markets owing to the existence of just 2 players in the market would give them an advantage in terms of market share thereby leaving out the rest, especially new players that try to enter the market. Consumers too are left with little options when it comes to entering the market. However, if the firms provide quality products to the consumers and also not undertake any collusive stance there would no doubt be equilibrium in the market.
This has been a guide to what is a duopoly and its meaning. Here we discuss the 2 types – Cournot & Bertrand Duopoly along with the examples, advantages, and disadvantages. You can learn about accounting from the following articles –