DUOPOLY COMPETITION

The online article "Why are Duopolies so Competitive," by Geoffrey Gannon (2006), discusses precisely the topic encapsulated by its title: the surprising competitiveness of duopolies. Microeconomic theory provides a robust conceptual model of pricing under perfect competition, and an equally robust model of monopoly pricing - one that is far more favorable to the firm, and far less favorable to consumers. Theory, however, is much less robust when it comes to oligopoly or duopoly. This is essentially because firms are competing against a handful of specific competitors - in the case of duopoly, against a single competitor - rather than against "the market," a pool of competitors too large to be considered individually.

It might seem that duopoly is "closer" to monopoly than an oligopoly of three to six or seven competitors is, and thus would be less competitive. However, as Gannon argues, the opposite is actually the case. He offers a couple of interesting reasons for this paradox. One is that, as he suggests, firms' pricing (if they have any price flexibility at all) is always a contest between greed

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Category: Economics - D