Duopoly Market

Duopoly Market

Duopoly, a market situation in which there are only two sellers. The theory of duopoly, originally associated with Antoine Augustine Cournot (1801-77), forms a special ease of the theory of oligopoly, which is applied to the situation, some way between monopoly and perfect competition, in which the number of sellers is not large enough to make the influence of any one on the price negligible. A monopoly exists when there is only one seller, oligopoly when there are few sellers; the simplest ease of oligopoly is that of two sellers, duopoly.

Duopoly provides a simplified model for showing the main prin-ciples of the theory of oligopoly: the conclusions drawn from analysing the problem of two sellers can be extended to cover situations in which there are three or more sellers.

If there are only two sellers producing a commodity a change in the price or output of one will affect the other; and his reactions in turn will affect the first. Thus each seller realizes that a change in his pike or output will set up a chain of reactions. He has to make assumptions about how the other will react to a change in his policy. The essential characteristic of the theory of duopoly is that neither seller can ignore the reactions of the other. The two sellers' fortunes are not independent; neither can take the other's policy for granted, bemuse it is in part determined by his own.

Under pure competition, or monopoly, price or output can be decided by reference to the conditions of demand and cost that face individual producers. But there is no simple answer in duopoly. It will depend upon the assumptions made by each seller about the reactions of the other. The answer is in this sense 'indeterminate'. Two limiting solutions are possible. Both sellers may charge the monopoly price as a result of agreement or independent experience. This supposes that both sell identical products and have the same costs, and that consumers are indifferent between them when both ask the same price. If a duopot moves his price above or below the monopoly price he will be worse off because profits are maximized at the monopoly price. The two thus behave as a single monopolist, and the market is shared between them. The other possible solution occurs when, as a result of a price war, each seller is making only normal competitive profits. Price is then fixed at the competitive level. Between these two Iimits there is an indeterminate number of possibilities about which theory can say little.

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