What is a Duopoly?

When a single market contains only two producers, it is said to be a duopoly, just as a monopoly is a market containing only one producer. Economists often use the term to refer to any market largely dominated by two producers, even if there are a number of other smaller producers. For instance, two large grocery chains may be called a duopoly, even if a few small family-owned markets are in operation in the same region. The large chains virtually dominate the market if the sales of the smaller stores are dwarfed in comparison.

Economists differ on the effects of duopolies on the market. According to the Cournot model, duopolies lower prices, although they not so much as markets with perfect competition, a condition marked by market circumstances in which no one participant dominates. The Bertrand model of competition, on the other hand, predicts that duopolies will eventually lower prices as much as perfect competition would. Like most theoretical models of economic forces, both the Cournot and the Bertrand models can be persuasive, but neither is viewed as definitive.

Many governments feel that it is important to prevent the emergence of duopolies, just as many have laws prohibiting monopolies. In a duopoly, both producers may find it easier and more profitable to collude — to work together against the customer rather than compete for the customers' business — resulting in price fixing. In the United States, there have been prominent court cases aimed at breaking duopolies. Experts say that when duopolies collude, they can be powerful enough to keep their competitors from gaining any market share.

The term can also be used in a political context. For instance, the American political system of the 20th century was dominated by two parties, the Republicans and Democrats. Although third parties occasionally enjoyed success at local levels, they rarely had a large impact on a national scale, facing resistance from the dominance of the established two-party system. This type of political system can also be referred to as a duopoly.

The opposite of a duopoly is a duopsony, in which only two consumers exist in a single market with several producers. An example of such a system might be a city with only two dentists. In such an environment, those two dentists would be the only consumers of professional dental products and the only two employers for individuals trained for dental trades. Just as in a duopoly the two producers can collude to keep prices high, in a duopsony the two consumers can keep prices low by cooperating.