duopoly

Duopoly

A situation in which two companies split all or nearly all the market share of a good or service. There are two models for duopoly: the Cournot model and the Bertrand model.

In the Cournot model, the two companies assume the output of the other, resulting in greater output than in a monopoly, but less than in a state of perfect competition. This pushes prices lower, but not as low as they would be in perfect competition.
In the Bertrand model, the duopolistic companies compete for the lowest possible price, resulting in perfect competition. Both models are applicable in different situations and times and neither expresses duopolistic behavior perfectly. Major examples of duopolies include Pepsi and Coca-Cola in the soft drink market and Microsoft and Apple in the computer operating system market.

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duopoly

a subset of OLIGOPOLY, describing a MARKET situation in which there are only two suppliers. There are a number of models of duopoly markets which fall into two main categories:

1. nonreactive models that do not allow for any anticipation by one firm of his competitor's reaction to either a price or quantity change. For example, in the Bertrand duopoly model, each supplier assumes that his rival will not change price in response to his own initial price cut, and this assumption will encourage him to cut his price in order to increase his sales. Since both firms reason in this way, the price will eventually be driven down to the competitive level (i.e. a NORMAL PROFIT equilibrium). In the Cournot duopoly model, it is quantity not price that is adjusted, with one firm altering its output on the assumption that his rival's output will remain unchanged. Since both firms reason in this way output will eventually be expanded to the point where the firms share the market equally and both secure only normal profits;
2. reactive models that explicitly assume that the two firms recognize that their actions are interdependent and hence will attempt to avoid mutually ruinous forms of rivalry. Also called collusive duopoly Specifically, firms will attempt to maximize their joint profits by establishing agreed prices above the competitive equilibrium

price. This can be achieved by informal means such as the acceptance by both duopolists that one of them acts as price leader (see PRICE LEADERSHIP model) or by means of formal COLLUSION between the two duopolists (see CARTEL).

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005