Why Are Duopolies So Competitive?
Duopolies are two companies that share the same product, service, region, or market with no significant differences in either company. Some duopolies have been successful while others have not because both firms often compete to out-perform and outperform the other by cutting costs and improving their products, services, logistics etc. Yet some duopolies fail due to the cost of integrating two distinct markets which imposes a lot of friction as well as sometimes conflicting strategies. As a result these are also referred to as ‘near-duopolies’ since they are much closer competitors than true duopolies which usually involve preferential give and take between firms on areas such as product quality and price.
There have been many examples of successful duopolies. However, there are a few common characteristics that all successful duopolies share; they usually exist in a dynamic environment, they are characterized by high competition and rivalry, their products are similar but not perfect substitutes and the firms usually have significant barriers to entry in terms of economies of scale/scope. This is important because it allows the firms to keep prices high due to finding efficiencies etc. but still keeps prices low enough for customers to buy their product instead of just one firm at a time since it is cheaper than buying both products separately. Furthermore, in a dynamic environment, both firms will have greater incentive to continue to modify their products/services/pricing etc. which also aids customer retention. Also, for example, high competition and rivalry also ensures that both firms are not wasteful by competing on margins alone but instead concentrate on innovating their product/service. Lastly, if the products are not perfect substitutes such as expensive luxury cars and mass produced cars then it creates a larger demand curve while if the firms do not have economies of scale or scope then they are forced to compete harder to win over customers.
However, sometimes duopolies fail due to their inability to integrate successfully after convergence of markets which imposes high costs of integrating two markets into one (should be avoided). This is because of popular strategies and tactics used by firms to get the upper hand over the other which often involves trying to outsource production to the other, utilizing price wars, or using different advertising strategies. Also, these strategies can lead to temporary reductions in costs but not long term reductions in costs due to profits being distributed amongst the two firms (instead of just one firm). Other specific examples are failure due to a major competitor shutting down their operation/selling off their stake in the two companies (for example when Apple bought NeXT).
Furthermore, duopoly competition is very different from incumbent competition as incumbents have a variety of methods for deterring startups that they are not currently using. This is because incumbents often benefit from other methods of competition such as acting as a monopoly by maintaining a market share above a particular level or repeatedly charging prices that are above (more profitable than) their competitors. Also, incumbents have the ability to merge with other firms in order to create new monopolies which puts all of the incumbent’s competitors out of business. However, incumbents normally have a greater bargaining advantage and are more likely to be sued due to their long term strategic advantages.
Another example is when the market becomes too saturated where there are multiple rivals who have similar products and services but they compete on providing better services/better quality at lower prices for customers which prevents consumers from switching between different suppliers. Also, once a market becomes too saturated, firms have a reduced incentive to innovate their product line as there are little profits to be made by the innovation and their customers are already satisfied. Furthermore, in order to stand out from their competitors firms have to reduce prices which results in price wars. Due to these factors, due to the inability of firms an industry becoming too saturated is that both firms will end up going bankrupt hence creating profits for the successful firm(s).
Finally as stated earlier, due to economies of scale/scope both companies are able to keep prices high yet still low enough for customers so that they can use either firm without buying two separate products. For example, a duopoly with a market share of 70% and 30% respectively is more profitable than producing two products by themselves. However, increasing economies of scale should be monitored in order to avoid decreasing equilibrium activities which would then result in the firm merging with their competitor in order to increase economies of scale.
The main difference between a monopoly and a duopoly is that monopolies have no close substitutes, while duopolies have at least one close substitute. In other words, monopolies have little competition and are very stable whereas firms in duopolies need to compete with each other if they want to remain competitive and earn profits. However, due to high competition and rivalry between firms in duopolies, they will often be forced to innovate their product/service which can lead to increasing entry barriers.
Other sources
https://en.wikipedia.org/wiki/Duopoly
http://www.investopedia.com/terms/d/duopoly.asp#ixzz3DZPUbTKi
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Conclusion; Understanding Duopoly Rivalry and Competitiveness: The market and its impact on rivalry, strategy and competitive advantage
The duopoly industry model is that there are two firms in the market who have to compete with each other to gain a competitive advantage or competitive edge. Due to this, their rivalry presents both short term and long term effects on their profitability. For example, when firms compete for market share firms may use price wars or innovation/technological development which can lead to a temporary increase in profits for the firm(s). However, this tactic(s) can often result in excess capacity which will then result in a fall in prices leading to lower profits.