Oligopoly I: Duopolies

Duopoly (from the Greek «duo», two, and «polein», to sell) is a type of oligopoly. This kind of imperfect competition is characterized by having only two firms in the market producing a homogeneous good. For simplicity purposes, oligopolies are normally studied by analysing duopolies. What strategies firms follow and their interactions are a key feature of this market structure.

In duopolies there are two variables of interest: the prices set by each firm and the quantity produced by each firm. Several models have been developed through time, from which we must highlight the Cournot, Stackelberg, Bertrand and the Edgeworth solution. The first two models seek the optimum quantity a firm should produce. Both have different conclusions as they have a different initial assumption. With time, and as the next two models proved, the focus changed to target the optimum price a firm should set in order to maximise profits.

There are also different perspectives in the analysis of duopolies, which deal with game theory. While the models by Antoine Cournot and Joseph Bertrand occur under a basis of simultaneous games, Heinrich von Stackelberg’s model depends on sequential games.

In the real world, firms interact with each other and have to consider the potential negative effects a price war may report in the long-run. Edward Chamberlin suggested that in an oligopolistic market, firms would soon recognise their interdependence and hold monopolistic prices without the implications of collusion, but that would give the same equilibrium point. Collusion equilibrium will be maintained for as long as a firm finds it more beneficial to do so. The moment a firm thinks it can achieve higher profits by deviating from it, it will do so.