A duopoly is a type of oligopoly, characterized by two primary corporations operating in a market or industry, producing the same or similar goods and services. The key components of a duopoly are how the firms interact with one another and how they affect one another.
In a duopoly, two companies control virtually the entirety of the market for the goods and services they produce and sell. While other companies may operate in the same space, the defining feature of a duopoly is the fact that only two companies are considered major players. The two companies – and their interactions with one another – shape the market they operate in.
Types of Duopolies
There are two primary types of duopolies: the Cournot Duopoly (named after Antoine Cournot) and the Bertrand Duopoly (named after Joseph Bertrand).
1. The Cournot Duopoly
Antoine Cournot was a French mathematician and philosopher. In the early to mid-1880s, Cournot used his understanding of mathematics to formulate and publish a significant model of what oligopolies look like. The model, known as the Cournot Duopoly Model (or the Cournot Model), places weight on the quantity of goods and services produced, stating that it is what shapes the competition between the two firms in a duopoly. In Cournot’s model, the key players in the duopoly make an arrangement to essentially divide the market in half and share it.
Cournot’s model speculates that in a duopoly, each company receives price values on goods and services based on the quantity or availability of the goods and services. The two companies maintain a reactionary relationship in regard to market prices, where each company changes and makes adjustments to their respective production, ending when an equilibrium is reached in the form of equal halves of the market for each firm.
2. The Bertrand Duopoly
Joseph Bertrand, operating around the same period as Cournot, was a French mathematician and economist. Bertrand became well known after publishing a number of reviews on math and economy-related articles written by professional peers and colleagues such as Leon Walras and Antoine Cournot.
Bertrand’s critique of Cournot’s model of duopolies is ultimately what led to the furthering of both oligopoly theory and game theory, most notably resulting in the formation of his own theory or model of duopolies, the Bertrand Model.
The primary difference between Cournot’s model and Bertrand’s model is that while Cournot believed production quantity would drive the competition between the two companies, Bertrand believed that the competition would always be driven by price.
Bertrand’s duopoly theory identified that consumers, when given a choice between equal or similar goods and services, will opt for the company that gives the best price. This would start a price war, with both companies dropping prices, leading to an inevitable loss of profits.
The Significance of a Duopoly
Duopolies are significant because they force each company to consider how its actions will affect its rival, meaning, how the rival firm will respond. It affects how each company operates, how it produces its goods, and how it advertises its services, and can ultimately change what and how goods and services are both offered and priced. When the two firms compete on price – in a Bertrand Duopoly – prices tend to dip to or below the cost of production, thereby wiping out any chance for profit.
For this reason, most duopolistic firms find it profitable and generally necessary to agree to form a sort of monopoly, setting prices that allow both firms to take one half of the market space and thus one half of the market’s profit. However, this is a tricky tactic if done incorrectly because the Sherman Act and other antitrust laws in the United States make the collusive activity illegal.
Duopolies, when operating and competing based on production quantity instead of price, tend to function better, avoiding any potential for legal issues and enabling each firm to share in the profits, reaching a price and operating homeostasis within their duopolistic market.
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