The duopoly characterizes a type of market in which two providers satisfy the needs of many customers. The competition between the two companies results in price fixing and volume competition. The duopoly is different from the monopoly and other forms of market.
Overview of market types: duopoly
This lesson introduces the duopoly. You will find out what a duopoly is and what significance this type of market has in practice. After introducing some well-known duopoly, we’ll show you how companies in a duopoly compete with each other. Finally, you will learn how the duopoly is differentiated from other forms of market. To deepen your knowledge, you can answer a few exercise questions after the text.
What is the significance of the duopoly?
According to dictionaryforall, duopolies arise in politics and in business. In this case, the market is dominated by two providers. These two providers share most of the market volume among themselves. It does not contradict a duopoly if there are also a few smaller players in the market.
The United States of America is a typical example of a political duopoly. With the Democrats and Republicans, only two parties are represented here, fighting for political supremacy in the country.
In economic practice there have been two well-known examples of duopoles: At the beginning of the 1990s there were the companies TD-1 (from which the T-Mobile group emerged) and Mannesmann D2 (now known as Vodafone) on the mobile communications market. With the addition of other providers, the duopoly position has been transformed into an oligopoly position over the past thirty years. There are a few providers and many buyers.
Construction of aircraft:
A worldwide duopoly – which still exists today – is the duopoly for wide-body aircraft. This is shared between the American aircraft manufacturer Boeing and the European aircraft manufacturer Airbus.
How is a duopoly implemented in practice?
When two companies share a market, they compete in the following two areas in particular:
- Price competition
- Volume competition
The price competition
The duopoly competition is also known as the “Bertrand competition” or “Bertrand model”. The providers compete on the selling price.
The following requirements must be met for the price competition:
- The first entrepreneur undercuts the price of the second entrepreneur. In this case, the first provider generates an absolute demand. The other market participant is not selling anything.
- If both companies in a duopoly demand the same price, they divide the market among themselves. One could speak of a balanced duopoly.
The volume competition
If two companies enter into the volume competition (also known as the “Cournot competition” ), they achieve a profit that is to be maximized by the volume sold. One entrepreneur does not know which output volume the other one decides on.
The normal demand curve applies to both providers. This means that if they set a high selling price, the demand will be low. If the providers lower the price, the amount in demand increases again.
The demarcation of the duopoly from other forms of market
In addition to the duopoly, there are the following other types of market:
If there is a monopoly on a market, there is only one provider. Since he does not have to face any competition, the monopolist can determine the prices for his products himself. He has to be careful not to set the price too high. This could have a detrimental effect on consumers’ willingness to pay.
An oligopoly can take two different forms in a market. In the supply oligopoly, few suppliers face many buyers. In the demand oligopoly it is exactly the opposite. Many suppliers offer the products that few consumers demand.
In the Polypol , the supply side and the demand side are in balance. Many providers meet many buyers. There is complete competition in this perfect market.