Duopoly
What is Duopoly?
A duopoly is a market with only two sellers, the simplest kind of oligopoly, where each firm's best price or output depends on what the other one chooses.
With only two firms, neither can plan in isolation, so the outcome is a strategic problem rather than a calculation, and the price that emerges depends on how the two compete. If they choose quantities, each holds output back a little and price settles between the competitive and the monopoly level. If they set prices on identical products and both have spare capacity, undercutting by a cent wins the whole market, and price can be driven down to marginal cost even with two sellers. If they coordinate, openly or quietly, they can approach the monopoly price, but each has a private incentive to shave price and take the extra sales, which is why such arrangements break down. A duopoly is simply an oligopoly with two firms, and it is not a duopsony, which has two buyers.
Duopoly: a worked example
Two airlines each pick a high or a low fare on the same route. If both keep fares high they earn $10 million each; if both cut, $4 million each; if one cuts while the other holds, the discounter takes $14 million and the other is left with $1 million. Check the options one at a time: against a high-fare rival, cutting pays $14 million versus $10 million, and against a cutting rival, cutting pays $4 million versus $1 million. Cutting wins either way, so both cut and both end at $4 million, well below the $10 million they could have shared.
The mistake students make with duopoly
Students assume two firms means monopoly prices, since collusion looks easy when there is only one partner to manage. Two is not enough to guarantee it. Each firm gains by quietly undercutting the agreement, and if the products are identical and capacity is spare, price competition can push price all the way down to marginal cost. Students also confuse duopoly with duopsony, which describes two buyers rather than two sellers.
Duopoly questions
Is a duopoly the same as an oligopoly?
A duopoly is a type of oligopoly, the case where the number of sellers is exactly two. Everything that defines oligopoly, mutual interdependence, barriers to entry and strategic behavior, still applies, just in its simplest form.
Do firms in a duopoly always collude?
Duopolists often want to collude but frequently fail, because the firm that breaks the agreement first captures a large block of sales while the agreement still holds for the other. Collusion survives better when firms deal with each other repeatedly, can observe each other's prices, and can punish cheating quickly.
What is the difference between a duopoly and a duopsony?
A duopoly has two sellers facing many buyers, while a duopsony has two buyers facing many sellers. The two are mirror images: duopolists hold price up by restricting how much they produce, and duopsonists hold price down by restricting how much they buy.
Related terms
Common comparisons
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