Why Are Duopolies So Competitive?

A duopoly is really a situation where two firms control almost all of the marketplace for something or service.

Duopolies could be surprisingly competitive. In the event that you remember that the cost of something or service is set solely by the best losing bid price and the cheapest losing ask price, you'll understand why a duopoly could be so competitive. Numerous inefficient competitors could have minimal affect on prices over time unless someone (the government or perhaps a band of idiotic investors) is ready to continually finance unprofitable operations within an unprofitable industry (think airlines).

Of course, there's always worries of a cost fixing scheme in a duopoly. Generally, however, that fear is unfounded. Human nature suggests a cost fixing scheme is a lot more more likely to occur within an oligopoly when compared to a duopoly. Humans weight worries of loss a lot more heavily compared to the greed of gain when coming up with calculations concerning the future. In a duopoly, mistrust escalates the concern with loss inherent to any price fixing scheme (namely, another guy will stab you in the trunk). Within an oligopoly, the diffusion of power and having less excess capacity at anybody firm makes price fixing very attractive. Price fixing within an oligopoly is really a much safer bet than price fixing in a duopoly.

There are, needless to say, other explanations why a duopoly is quite unlikely to bring about a cost fixing scheme. And a healthy does of fear, there's an often unhealthy does of hate in duopolies. There's always just one single scapegoat in a duopoly. Hatred is really a personal emotion; if spread over way too many objects it will wane away. Finally, there's the easy proven fact that both competitors in a duopoly tend really big, really agile, really cutthroat players. The procedure before a duopoly is commonly sort of wolfing run, where two pups are separated from the runts.

Having said all that, price fixing can be done in a duopoly. Some duopolies aren't the consequence of competition but of nationalization and privatization, although that is relatively rare since a nationalized monopoly won't often create a lasting duopoly (it'll either remain a monopoly once privatized or get crushed by new, private competitors).

Finally, a cost fixing scheme makes more sense in a commodity business. In the end, any product differentiation limits the amount to which general demand does apply to specific competitors' products.