Duopoly

A duopoly is a market in which two sellers supply all or nearly all of the output. It is the simplest form of oligopoly: with only two firms, each must take account of the other's likely response before setting a price, choosing how much to produce or launching a product. The outcome can range from fierce price wars to quiet, near-monopoly pricing.

The term is used both strictly, for markets with exactly two suppliers, and loosely, for markets where two firms dominate even though smaller rivals exist. Duopoly sits between monopoly and wider oligopoly on the spectrum of competition. The buying-side equivalent, with two dominant buyers, is called a duopsony.

Imagine a small town with exactly two petrol stations facing each other across a junction. If one cuts its price by a few cents, drivers switch, so the other has to match. If one raises its price, it loses customers unless the other follows. Each owner spends a lot of time watching the other's sign.

Two things can happen. The owners may keep undercutting each other until both barely make money. Or each may realize that a price cut will only be matched, and both settle at a comfortably high price without ever talking. Which path a duopoly takes is the central question economists ask about it.

• Cournot (1838). The French mathematician Antoine Augustin Cournot modeled two firms that each choose a quantity, taking the other's output as given. The result lies between monopoly and competition.
• Bertrand (1883). Joseph Bertrand argued that if firms compete on price with identical products, each will undercut the other until price falls to marginal cost. This "Bertrand paradox" shows that two firms can be enough for a competitive result.
• Stackelberg (1934). Heinrich von Stackelberg added a leader that commits to its output first and a follower that reacts, giving the leader a larger share; it relates to first-mover advantage.

Each model's equilibrium is a Nash equilibrium, a pair of choices from which neither firm wants to move alone, and duopoly is a standard teaching case in game theory.

Suppose market demand is linear, $P = a - bQ$, where total output $Q$ is the sum of the two firms' outputs, and both have the same constant marginal cost $c$. In the Cournot equilibrium, each firm produces:

• $a$ is the price at which demand would fall to zero.
• $b$ is the slope of the demand curve.
• $c$ is each firm's marginal cost.
• $q_1$ and $q_2$ are the outputs of firm 1 and firm 2.

Worked example: with $a = 100$, $b = 1$ and $c = 10$, each firm produces $90 \div 3 = 30$ units, total output is 60 and the price is $100 - 60 = 40$. A monopolist would produce 45 units and charge 55; an industry in perfect competition would produce 90 units at a price of 10. The duopoly lands in between, which is the classic Cournot result.

Markets often described as duopolies, with the caveat that other rivals exist, include:

• Large commercial aircraft. Boeing and Airbus build almost all large passenger jets, because development costs and economies of scale make entry extremely hard.
• Card payments. Visa and Mastercard operate the dominant general-purpose card networks in many countries, alongside American Express, Discover, UnionPay and domestic card schemes such as India's RuPay.
• Mobile operating systems. Apple's iOS and Google's Android run nearly all smartphones, a position reinforced by network effects between users and app developers.
• Soft drinks. Coca-Cola and PepsiCo are the usual textbook example of a differentiated-product duopoly that competes heavily through branding rather than price.

Duopolies often emerge where fixed costs are high, products benefit from compatibility or a large network, or regulation limits the number of licenses.

With only two firms, coordinating prices is easier, whether through an explicit agreement, which would be an illegal cartel, or through tacit understanding, which is harder to prove. Competition authorities therefore scrutinize mergers that would reduce three firms to two, and watch closely for conduct that excludes a third player. In September 2024 the US Department of Justice sued Visa, alleging that it had illegally monopolized debit network markets; in Europe, the 2015 Interchange Fee Regulation caps the interchange fees paid on most consumer card transactions.

Not all duopolies harm customers. If products are similar and switching is easy, the Bertrand logic suggests prices can be close to cost. Rivalry between Airbus and Boeing has also driven large gains in fuel efficiency. Critics respond that two firms rarely have strong reasons to fight on price for long, and that the main protection is the threat of new entry or regulation of the fees they charge.

• OpenStax Principles of Economics: Oligopoly
• US Department of Justice: Justice Department Sues Visa for Monopolizing Debit Markets