A duopoly is a type of oligopoly having two primary corporations operating in a market or industry, and producing the same or similar goods and services. What distinguishes a duopoly are how the firms interact with each other or affect each other. Two companies comprising a duopoly control virtually the entirety of the market for the goods and services they produce and sell. Other companies may operate in the same space, but the defining feature of a duopoly is the fact that only two companies are considered key players. The two firms in duopoly, and their interactions with one another, shape the entire market they operate in.
Duopolies force each company to consider how its actions will affect its rival, and how the rival firm will respond. This affects how each company operates, how it produces its goods, and how it advertises its services, ultimately changing what and how goods and services are offered and priced. When the two firms compete on price, then the prices tend to dip to or below the cost of production, therefore affecting any chance for profit.
The Cournot Duopoly, which is named after Antoine Cournot, and the Bertrand Duopoly which is named after Joseph Bertrand are the two primary types of duopolies. 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.
Duopolistic firms find it profitable and generally necessary to agree to form a monopoly, setting prices that allow both firms to take one half of the market space and thus one half of the market’s profit. This tactic if done incorrectly brings in the Sherman Act and other antitrust laws in the United States which make collusive activity illegal.
Duopolies, when competing based on production quantity instead of price avoid potential legal issues and enable each firm to share in the profits, reaching a price and operating homeostasis within their duopolistic market.
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.
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, resulting in the formation of his own theory or model of duopolies, the Bertrand Model. 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 could start a price war, with both companies dropping prices, leading to an inevitable loss of profits for both.