What Is a Duopoly?

What Is a Duopoly?

Let me start by defining a duopoly for you—it's an oligopoly where two companies own all or most of the market for a given service or good.

You should understand that a duopoly occurs when two companies together control all or nearly all of the market for a specific product or service. It's the most basic form of oligopoly, which is a market dominated by a small number of companies. If the two players in a duopoly collude on prices or output, it can have the same market impact as a monopoly.

Key Takeaways

A duopoly is a form of oligopoly with only two companies dominating the market. These companies tend to compete against each other, which reduces the chance of monopolistic power. Think of Visa and Mastercard as a duopoly that controls the payments industry in Europe and the United States. One downside is that consumers have limited product choices. Another is that the two players might collude to raise prices for consumers.

Understanding a Duopoly

In a duopoly, two competing businesses control the majority of the market for a particular product or service they offer. A business can be part of a duopoly in one sector even if it operates in others that aren't dominated that way.

For instance, Google and Meta have dominated digital advertising for much of the 21st century, functioning as a duopoly there. But Google isn't in a duopoly for things like computer software.

Remember, a duopoly is a type of oligopoly and differs from a monopoly, where one producer controls everything. In a duopoly, companies compete, keeping prices lower and benefiting you as a consumer. However, with only two players, there's a risk of forming a monopoly through collusion or if one fails.

Important Note on Collusion

In a duopoly, oligopoly, or monopoly, the involved parties might collude to inflate prices. This leads to consumers paying more than in a competitive market, so collusion is illegal under U.S. antitrust law.

Oligopoly

A duopoly is a specific type of oligopoly, where a few businesses control most of the market. Not all oligopolies are duopolies—for example, the automobile industry has more than two producers responding to global demand.

Duopoly vs. Duopsony

Don't confuse a duopoly with a duopsony. In a duopoly, two businesses control the market for a product or service, like Coca-Cola and Pepsi in cola beverages.

A duopsony, on the other hand, is when there are only two large buyers for a product or service, giving them bargaining power over suppliers. Intel and AMD are a duopsony in the computer chip market, influencing their suppliers heavily. It's also called a buyer’s duopoly and relates to oligopsony, where buyers are limited.

Advantages and Disadvantages of a Duopoly

Duopolies affect both companies and consumers positively and negatively. The two companies can cooperate to maximize profits without other competitors interfering, creating a collusive equilibrium.

They can focus on improving existing products instead of innovating new ones under pressure. Competition between them controls prices, preventing monopoly levels, which benefits you.

On the downside, duopolies limit free trade by reducing diversity in goods and services, leaving you with few options. It's hard for new competitors to enter and gain share, stifling innovation. Prices might be higher if competition doesn't drive them down, and price fixing or collusion can occur, costing you more with fewer alternatives.

Two Main Types of Duopoly

There are two main types: Cournot and Bertrand duopolies.

The Cournot model says competition is structured by the quantity of goods produced. The companies split the market collaboratively, and if one changes production, the other adjusts to keep a 50/50 equilibrium.

The Bertrand model focuses on price as the competition driver. Consumers pick the lower-priced option if quality is equal, leading to price wars for market share.

Examples of Duopoly

Boeing and Airbus command the large passenger airplane market as a duopoly. Apple and Samsung dominate smartphones, with market share highly concentrated despite other players.

Visa and Mastercard own over 80% of EU card transactions, prompting the European Central Bank to seek ways to break it up, like interchange fee caps or instant payment schemes that could eliminate the need for their global services.

Frequently Asked Questions

What is a duopoly in economics? It's when two companies dominate a market, potentially impacting it like a monopoly if they collude on prices or output.

What's an example? Apple and Samsung in smartphones.

Is a duopoly an oligopoly? Yes, it's the most basic form of a market dominated by few companies.

The Bottom Line

You'll find duopolies in markets like Coca-Cola and Pepsi in soda or Apple and Samsung in smartphones. As a form of oligopoly, their biggest issue is the potential for companies to dominate, collude, and raise prices for you.