A duopoly is a market with only two dominant producers, which can lead to collusion and price fixing. Economists differ on its effects, and governments often try to prevent it. A duopsony is the opposite, with only two consumers in a market with multiple producers.
When a single market contains only two producers, it is considered a duopoly, just as a monopoly is a market that contains only one producer. Economists often use the term to refer to any market largely dominated by two producers, even if there are several other smaller producers. For example, two large supermarket chains can be called a duopoly, even if some small family markets are operating in the same region. The big chains practically dominate the market if the sales of the smaller stores are smaller in comparison.
Economists differ on the effects of duopolies on the market. According to Cournot’s model, duopolies lower prices, although they do not reach markets with perfect competition, a condition marked by market circumstances in which no one participates. Bertrand’s competition model, on the other hand, predicts that duopolies will eventually drive prices down as much as perfect competition. Like most theoretical models of economic forces, both Cournot’s and Bertrand’s models can be persuasive, but neither is seen as definitive.
Many governments feel it is important to prevent duopolies from emerging, just as many have laws prohibiting monopolies. In a duopoly, both producers may find it easier and more profitable to collude – working together against the customer rather than competing for the customer’s business – resulting in price fixing. In the United States, there have been prominent court cases aimed at breaking up duopolies. Experts say that when duopolies collude, they can be powerful enough to prevent their competitors from gaining market share.
The term can also be used in a political context. For example, the 20th century American political system was dominated by two parties, the Republicans and the Democrats. While third parties have occasionally been successful at the local level, they have rarely had a major impact on a national scale, facing resistance for dominance of the established two-party system. This type of political system can also be called a duopoly.
The opposite of a duopoly is a duopsonia, in which only two consumers exist in a single market with multiple producers. An example of such a system might be a town with only two dentists. In this environment, these two dentists would be the only consumers of professional dental products and the only two employers for individuals trained in the dental industry. Just as in a duopoly the two producers can conspire to keep prices high, in a duopsony the two consumers can keep prices low by cooperating.
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