Duopoly

What Is a Duopoly?

A duopoly is a situation where two companies together own all, or nearly all, of the market for a given product or service. A duopoly is the most basic form of oligopoly, a market dominated by a small number of companies. A duopoly can have the same impact on the market as a monopoly if the two players collude on prices or output.

Collusion results in consumers paying higher prices than they would in a truly competitive market, and it is illegal under U.S. antitrust law.

Understanding a Duopoly

In a duopoly, two competing businesses control the majority of the market sector for a particular product or service they provide. A business can be part of a duopoly even if it provides other services that do not fall into the market sector in question. For example, Google and Facebook have dominated the digital advertising landscape for much of this decade and are a duopoly, but Google is not associated with a duopoly in its other product sectors, such as computer software.

A duopoly is a form of oligopoly and should not be confused with a monopoly, where only a single producer exists and controls the market. With a duopoly, each company will tend to compete against the other, keeping prices lower and benefiting consumers. However, since there are only two major players in an industry under a duopoly, there is some likelihood that a monopoly could be formed, either through collusion between the two companies, or if one goes out of business.

An oligopoly exists when a few businesses control the vast majority of the market sector. While a duopoly qualifies as an oligopoly, not all oligopolies are duopolies. For example, the automobile industry is an oligopoly because there are a limited number of producers, but more than two, who must respond to worldwide demand.

In a duopoly, oligopoly, or monopoly, the parties involved may collude and use their power to inflate prices.

Collusion Practices

Collusion involves an agreement between competing entities with the purpose of manipulating the market often by inflating prices. As described in this article from The Washington Post, in 2012, Apple was accused of colluding with publishers to artificially inflate the prices of e-books offered through the iBookstore service. The accusation included charges of a conspiracy between Apple and five publishers, suggesting that pricing was fixed creating an unfair situation within the consumer market.

Monopolies

A closely related concept is a monopoly, a situation in which a single company dominates the market. The United States Postal Service (USPS), which is by law the sole provider of first-class mail services, is an example of a monopoly. However, USPS does not hold a monopoly over other shipping services, such as parcels, because these services are not covered within the law.

Duopoly vs. Duopsony

A duopoly should not be confused with a duopsony. In a duopoly, two competing businesses control the majority of the market sector for a particular product or service they provide. Coca-cola and Pepsi represent a duopoly because the two firms control almost the entire market for colas.

A duopsony, however, is an economic condition whereby there are only two large buyers for a specific product or service. The buyers, therefore, have considerable bargaining power and can determine market demand as long as there are plenty of firms vying to sell to them.

Intel Corp. (INTC) and Advanced Micro Devices Inc. (AMD) are an example of a duopsony. Combined, they command nearly 100% of sales in the computer processing chip market and have substantial influence over their suppliers. Duopsony is also known as a "buyer's duopoly" and is related to oligopsony, a term describing a market where there are a limited number of buyers.

Advantages and Disadvantages of a Duopoly

Duopolies can have both positive and negative effects on the companies in the duopoly and the consumer. First, the two companies can cooperate with each other and maximize their profits as there are no other competitors. In other words, there is a collusive cooperative equilibrium. The companies in a monopoly can concentrate on improving their existing products rather than feeling pressure to create new products for the market. Because the two companies compete with each other, the consumer benefits because prices are controlled to some extent and do not become monopoly prices.

The disadvantages of duopolies are that they limit free trade. With a duopoly, the supply of goods and services lacks diversity, and there are limited options for consumers. Also, it is difficult for other competitors to enter the industry and gain market share. The absence of competitors in a duopoly stifles innovation. With a duopoly, prices may be higher for consumers when the competition is not driving prices down. Price fixing and collusion can occur in duopolies, which means consumers pay more and have fewer alternatives.

Pros of duopolies

Cons of duopolies

Examples of Duopoly

Boeing and Airbus have been considered a duopoly for their command of the large passenger airplane manufacturing market. Similarly, Apple and Samsung dominate the iPhone market. While there are other companies in the business of producing passenger planes and iPhones, the market share is highly concentrated between the two businesses identified in the duopoly.

Visa (V) and Mastercard (MA) are considered a duopoly. The two financial powerhouses own over 80% of all European Union card transactions. This dominance has led the European Central Bank (ECB) to try to find ways to break up the duopoly as outlined in an article by "FinExtra.com." So far, the ECB has tried interchange fee caps, but a new scheme that would allow instant payments using national payment cards across European countries could be a game-changer.

A European infrastructure for instant payments would eliminate the need for people to use the global services of Visa or Mastercard. Another suggestion is to allow instant payments at points of interaction or points of sale so that the need for the traditional cards would disappear altogether.

Duopoly FAQs

What Is a Duopoly in Economics?

A duopoly exists when two companies dominate a market for a given product or service. A duopoly can have the same impact on the market as a monopoly if the two players collude on prices or output.

What Are the Types of Duopoly?

The two main types of duopoly: the Cournot duopoly and Bertrand duopoly.

The Cournot duopoly model states that the quantity of goods or services produced structures the competition among the two companies in an industry. According to the model, the two companies decide collaboratively to split the market between one another. If one company alters its production levels, the other company must also alter its production to maintain the equilibrium of a 50/50 split of the market.

On the other hand, the Bertrand duopoly model states that it is price and not production quantity that structures the competition between the two firms. The model posits that consumers will choose the lower-priced product when given two choices of equal quality. This implies that the two companies in the duopoly will engage in a price war to gain market share.

What Is an Example of a Duopoly?

An example of a duopoly is the dominance that Apple and Samsung have over the iPhone market.

What Is Duopoly and Oligopoly?

A duopoly is the most basic form of oligopoly, a market dominated by a small number of companies.

The Bottom Line

There are plenty of examples of duopolies in today's markets — Coca-Cola and Pepsi in the soda industry and Apple and Samsung in the iPhone industry. Duopolies are a form of oligopoly, and the biggest disadvantage of duopolies, oligopolies, and monopolies is that the companies involved can dominate markets, collude with each other, and raise prices for the consumer.