Why Are Duopolies So Competitive
Below is a MRR and PLR article in category Business -> subcategory Other.
Why Are Duopolies So Competitive?
A duopoly occurs when two firms dominate nearly all of the market for a product or service. Surprisingly, duopolies can be very competitive. The pricing in such markets is often determined by the highest losing bid and the lowest losing ask price, which can drive competitiveness. Inefficient competitors usually have little impact on prices unless someone continually funds unprofitable ventures?"a scenario often seen in industries like airlines.
While there’s always a concern about price-fixing in a duopoly, it’s generally unfounded. Human behavior suggests that price-fixing is more likely in an oligopoly than a duopoly. People tend to fear losses more than they desire gains, making them wary of any price-fixing agreement. In a duopoly, mistrust between the two firms amplifies this fear, as each suspects the other might break the agreement. Conversely, in an oligopoly, distributed power among several firms makes price-fixing appealing and more secure.
There are additional reasons why duopolies rarely result in price-fixing. Besides fear, there can be strong animosity between the two firms. With only one main competitor, this rivalry can become personal and intense, preventing collusion. Furthermore, both competitors in a duopoly are usually large, agile, and highly competitive. The evolution to a duopoly often leaves only the strongest companies standing.
While price-fixing is occasionally possible, it's uncommon in duopolies that evolve from competition. Some arise from nationalization and privatization, but a nationalized monopoly rarely results in a lasting duopoly after privatization?"it either remains a monopoly or faces competition.
Price-fixing is more plausible in commodity businesses where products are undifferentiated. However, with differentiated products, such as Coke and Pepsi, price-fixing is unlikely. Though Coke and Pepsi share a market, they remain distinct in consumers' eyes. Many people, myself included, prefer one over the other despite pricing differences. In such scenarios, product differentiation limits the effectiveness of price-fixing.
In conclusion, the competitiveness and dynamics of duopolies, driven by mistrust and rivalry, often prevent collusion and maintain market competition.
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