DUOPOLY

A duopoly refers to a market where there are only two firms selling a particular product, service, or commodity. It is a special case of an oligopoly, which is a market condition where the production of identical or similar products is concentrated in a few large firms. Examples of oligopolies in the United States include the steel, aluminum, automobile, gypsum, petroleum, tire, and beer industries. While unregulated competition may result in oligopolies in certain industries, genuine duopolies in unregulated markets are quite rare.

Duopolies occur mainly as theoretical constructs that are useful in illustrating competitive behavior of business firms. As is the case with oligopolies, duopolies affect a company's competitive behavior. In a competitive market situation that is not a duopoly or oligopoly, firms compete by acting for themselves to maximize profits without regard to the reactions of their competitors. In a duopoly, one firm must consider the effects of its actions on the other firm in the industry. The actions of one firm in the duopoly typically cause a reaction by the other firm in the industry.

Prices in oligopolistic industries tend to be unstable to the extent that companies will shade, or lower, their prices slightly to gain a competitive advantage. In duopolies it is more common for prices to be artificially high, at least to the extent that both companies can be profitable. It must be remembered that collusion between firms to fix prices is illegal under U.S. antitrust laws, so duopolies and oligopolies must reach industry agreements on pricing indirectly. Companies can signal their pricing intentions indirectly in a variety of ways, such as through press releases, speeches by industry leaders, or comments given in interviews. In some cases there is a recognized price leader with the other firm setting its prices according to that of the industry's price leader.

Until the end of 1994, rules of the Federal Communications Commission (FCC) allowed only two cellular phone companies in a market. Thus federal regulations created duopolies in each local market for cellular phone service. From 1985 to 1991, rates remained virtually unchanged in the nation's top ten markets. When the FCC announced it would open local markets to greater competition by auctioning off new licenses, rates fell dramatically. Even though new cellular phone services were not yet operating, simply the threat of competition served to cause rates to fall.

The cellular phone situation illustrates how prices in duopolies can remain artificially high without the threat of outside competition. With cellular phone duopolies, the two services competing in each market did not need to expand their customer base significantly by lowering prices. Once additional services entered the marketplace, however, additional subscribers were needed for the new services to be profitable. These new customers were attracted primarily by lowering the price of the service.

In the radio and television industries, which are both also regulated by the FCC, duopolies refer to ownership of two stations in one market. Radio duopolies refer to the ownership of an FM and AM station in the same market. Television duopolies refer to the ownership of two television stations in a single market. The Telecommunications Act of 1996 relaxed the rules governing radio-station ownership in a single market, but television duopolies are still forbidden under current FCC regulations. While such ownerships are referred to as duopolies, they are not true duopolies in the sense of two firms providing a product or service in a single market.