The duopoly is a type of competition which takes place within a market which is characterized mainly by the existence of two companies which produce an article, and who control the totality of a specific market, thanks to the joint fixing of the prices of that product.
What is duopoly?
It is a way of competing that occurs within a market and is characterized mainly by the existence of two different companies that produce the same item and control the entire market, setting prices together and using this price as a tool to achieve control over products within the market.
Companies in duopoly use price as the main tool to control the market and defend companies’ positions in duopoly work. In this way, when they set prices together, companies are able to prevent the entry of new competitors who may threaten their market dominance. These companies act as a classic monopoly, trying to maximize all their profits by equating their income to the marginal cost of production. In the Duopoly, since there are only two producers of the same product, a change in the price of one of them or the production of one of them will affect the other and the reactions of the latter will in turn influence the former.
Characteristics of duopoly
- The two companies that participate in the duopoly look for ways to maximize all their profits by looking at how to match their income through the product sale plus the costs involved in producing it.
- Companies agree to share the market in half.
- Industries have the ability to set prices and have the power within the market to calculate and set these prices above marginal cost.
- They produce loss of efficiency, a characteristic of monopolies.
- They do not have the capacity to allow competitors to enter.
There are two types of models when we refer to the duopoly. These are the following:
- Cournot Model: This model is based on the interaction between the two competing companies, which are directly affected by changes in each other’s production. This means that the companies are going to function attending and depending on the decisions of their direct competition. In other words, the two firms are going to react, each of them oriented to the changes that occur in the other one’ s production.
- Bertrand Model: when there is proper interaction between companies, its functions focus on the game produced with the companies’ price levels so that, both companies can operate independently of each other. Each of the related companies will assume that the other will not change its prices due to possible price decreases.
- Stackelberg Model: Stackelberg’s equilibrium is mainly based on Stackelberg’s theory of competition, which tells us that two or more companies compete in order to completely dominate the market. One of these companies is known as a leading company, it already has a dominant position and because it has a large number of strategies that determine the one of its followers or its competitors.
Advantages of duopoly
- Companies cooperate with each other to maximize their profits.
- There is a cooperative equilibrium that is known as collusive
- Companies compete friendly with each other to generate higher profits.
- Each of the companies is pending on the other’s decisions to agree on prices and production. In this way they are able to reach an agreement to optimize their profits.
- As a result of the competition between duopoly businessmen, consumers are the ones who are favored because monopoly prices have been eliminated.
Disadvantages of duopoly
- It affects free trade opportunities between companies as they are dependent on each other.
- There is no diversified supply of goods and services whose production requires an enormous amount of capital.
- The theory that competition favors consumer interests is very difficult to achieve as the two companies will find themselves struggling to improve prices and to impose
- On many occasions, State must intervene in order to control both the quality of the goods or services offered and the setting of maximum prices offered to the public.
Among the best-known examples of duopoly we can mention are Visa and MasterCard credit cards. These two cards handle the largest proportion of the electronic card market. Another clear example is Coca Cola and Pepsi, which are the largest industries with duopolies in the soft drink market. In Mexico, for example, we can mention Televisa and Tv Azteca, these two television networks are the leading companies in this country.
Written by Gabriela Briceño V.