Classification of Market Structure - Duopoly

• Duopoly is a market situation in which there are only two major firms selling a particular product or service.
• These two firms together dominate the market and control most of the supply.
• Duopoly is a special case of oligopoly, because oligopoly means “a few firms”, and in duopoly there are exactly two firms.

"When there are exactly two sellers in the market this is a special case of oligopoly called duopoly." – Cohen and Cyret.

• In a duopoly, each firm’s decisions (about price, output, advertisement, etc.) affect the other firm.
• Before changing its price or output, each firm must think: “How will the rival react?”
• This mutual dependence makes the behaviour of firms strategic and sometimes unpredictable.

Example (simple): If Firm A reduces its price to increase its sales, Firm B may also reduce its price to avoid losing customers. Both firms closely watch each other.

(a) Two dominant producers

• Only two large firms supply most of the output in the market.
• Each firm holds a significant share and can influence price and output.

(b) Interdependence and uncertainty

• Each firm’s profit depends not only on its own actions but also on the rival’s actions.
• Firms face uncertainty because they cannot be sure how the rival will react to changes in price, output, or advertising.

(c) Homogeneous or differentiated products

• The two firms may sell homogeneous products (almost identical, e.g., petrol of two brands) or differentiated products (slightly different, e.g., flavours, design, brand image).
• As long as only two firms dominate, the situation is still called a duopoly, whether products are identical or differentiated.

(d) No single, stable demand curve for each firm

• The demand for each firm’s product depends on what the rival does.
• Because the rival’s behaviour can change, it is difficult for a firm to draw one fixed demand curve.
• Each firm forms its own estimate (or “subjective” view) of demand based on assumptions about the rival.

(e) Strategic behaviour: moves and counter‑moves

• Firms in a duopoly use different strategies such as price cuts, heavy advertising, improving quality, giving discounts, etc.
• The rival responds with counter‑moves to protect or increase its own market share.
• This leads to continuous “moves and counter‑moves” between the two firms.

• Soft drinks (global cola market): Coca‑Cola and Pepsi are two dominant firms.
• Aircraft manufacturing: Boeing and Airbus are the two main producers of large passenger aircraft.
• Card payment networks (in many countries): Visa and Mastercard dominate card payments.

• A duopoly is a market with exactly two dominant firms and is a special type of oligopoly.
• The key feature of duopoly is strong interdependence: each firm’s decisions affect the other, and each anticipates the rival’s reaction.
• Products may be homogeneous or differentiated, but only two firms control most of the market.
• Each firm faces uncertainty and cannot rely on a single, stable demand curve because demand depends on the rival’s behaviour.
• Strategic moves and counter‑moves (like price changes and advertising) are common in duopolistic markets.