Duopoly – Definition

Cite this article as:"Duopoly – Definition," in The Business Professor, updated November 24, 2018, last accessed July 5, 2020, https://thebusinessprofessor.com/lesson/duopoly-explained/.

Back to: ECONOMICS, FINANCE, & ACCOUNTING

Duopoly Definition

Duopoly occurs when the total market of a product or service or most of the market is controlled by only two corporations. It is the very basic form of oligopoly. For example, Company X and Company Y provide internet service in a market and there are no other companies providing the same service in that market. This is a duopoly situation.

In this market situation, a company needs to consider the reaction of its sole competitor while exerting market control of the product or service. At times these two corporations collude on prices or output when exerting market control. This has the same impact as a monopoly. The customers need to pay a higher price in absence of a truly competitive market. This is illegal in the U.S.

A Little More on What is a Duopoly

A company can be a part of duopoly for a particular product while their other products do not necessarily fall under a duopoly situation. In the U.S. Apple and Amazons dominate the e-book marketplace, there are other players who offer e-books but these two corporations own the most of the market. Most of the businesses are concentrated between these two companies. Apple and Amazon both are engaged in the businesses of other products too where they face competition from other players.
The two competing companies in a duopoly may collude to artificially inflate the prices of a product. These are generally an informal agreement between the two companies and as there are no other companies providing the same product or service the customers are bound to buy their products at that inflated price.

Duopoly is not an ideal market situation as it poses threat to the concept of free market economy.

References for Duopoly

Academic Research on Duopoloy

  • ●      Cooperative and noncooperative R & D in duopoly with spillovers, d’Aspremont, C., & Jacquemin, A. (1988). The American Economic Review78(5), 1133-1137. This article examines the two types of agreement of both cooperative and non-cooperative firms under R&D. Further studies show that these agreements (stated in the paper) result in the reduction of R&D expenditures. Thus, we go on to analyse the externalities and spillovers in R&D from one firm to another.
  • ●      Price and quantity competition in a differentiated duopoly, Singh, N., & Vives, X. (1984). The RAND Journal of Economics, 546-554. This article analyzes the duality of prices and quantities in a differentiated duopoly. It is shown that if firms can only make two types of binding contracts with consumers, the price contract and the quantity contract, it is a dominant strategy for each firm to choose the quantity (price) contract, provided the goods are substitutes (complements).
  • ●      A model of duopoly suggesting a theory of entry barriers, Dixit, A. (1979). The Bell Journal of Economics, 20-32. This research examines a model of duopoly with fixed costs. The objective is to show that the presence of an established firm in a model, might create barriers for the entry of new firms. Also, even when there is no constraints on entry, the new firm might find it hard to progress if price of their products is same with that of the established firm.
  • ●      Partial privatization in mixed duopoly, Matsumura, T. (1998). Journal of Public Economics70(3), 473-483. This article aims to educate the reader on the importance of partial privatization in a mixed duopoly, where a privatized firm owned by the public and private sector is used as case study. The objective of this research is to show that full privatization or nationalization of the shares of a firm by either party in a duopoly does not provide optimal results under normal circumstances.
  • ●      Measuring duopoly power in the British electricity spot market, Wolfram, C. D. (1999). American Economic Review89(4), 805-826. This research examines the study of market power in the British Industry. This research aims to show that the prices of electricity is not as high as stipulated by various models, although it is higher than marginal cost. It also shows the relationship between various factors and price.
  • ●      Price competition in a duopoly common retailer channel, Choi, S. C. (1996). Journal of retailing72(2), 117-134. This research examines the effects of (horizontal) product differentiation and (horizontal) store differentiation in a system where there are duopoly manufacturers and duopoly common retailers.
  • ●      Duopoly models with consistent conjectures, Bresnahan, T. F. (1981). The American Economic Review71(5), 934-945. This paper explores different duopoly models with consistent conjectures with regards to the Bertrand and Cournot theories. After different research and studies, results show that neither the Bertrand nor the Cournot theories are compatible with  conjectures, and thus, a new theory is employed. This article aims to show that the Nash’s equilibrium is the perfect theory for analysing consistent conjectures.
  • ●      Speculation duopoly with agreement to disagree: Can overconfidence survive the market test?, Kyle, A. S., & Wang, F. A. (1997). The Journal of Finance52(5), 2073-2090. This article emphasizes on overconfidence and how it helps manager generate higher profits in a duopoly market.
  • ●      Product and price competition in a duopoly, Moorthy, K. S. (1988). Marketing science7(2), 141-168. This research explores the problems posed in a duopoly system. The objective is to show the factors that contribute to the successes and failures of a particular firm as opposed another in a duopoly system.
  • ●      Fee versus royalty licensing in a Cournot duopoly model, Wang, X. H. (1998). Economics letters60(1), 55-62. This paper finds that royalty licensing can be superior to fixed-fee licensing for the patent-holding firm when the cost-reducing innovation is non-drastic. The reason for this result is that the patent-holding firm enjoys a cost advantage over the licensee under royalty licensing while the two firms compete on equal footing under fixed-fee licensing.
  • ●      Price duopoly and capacity constraints, Levitan, R., & Shubik, M. (1972). International Economic Review, 111-122. This paper examines a simple model of a duopoly situation where two firms compete with price as the strategic variable and in which the firms are limited to capacity constraint. Using this model, this paper aims to review some important developments of the duopoly theory concerned with the existence of equilibrium.
  • ●      Cooperative and noncooperative R&D in duopoly with spillovers: Comment, Henriques, I. (1990). The American Economic Review80(3), 638-640. This article examines the Aspremont and Jacquemin duopoly model of R&D spillovers aimed at comparing several equilibrium concepts (for cooperative and non-cooperative models). The authors wishes to show that the Aspremont and Jacquemin model is only meaningful in cases where the noncooperative solution is stable. They also wish to show the impact of spillover level on equilibrium for the cooperative model.

Was this article helpful?