Duopoly is a market structure in which two entities, protected from the appearance of other sellers, act as the only producers of standardized products that do not have close substitutes. Let's consider this model in more detail.
Duopoly: meaning
This structure allows you to illustrate the impact of the proposals of an individual seller on the equilibrium issue in relation to the response of a competitor. This model was proposed by the French scientist Cournot. Duopoly in the economy is the following scheme. Each of the two entities assumes that the competitor will maintain its output at the current level unchanged.
Duopoly: what is it?
Consider how the circuit works. Duopoly is a model that is based on 2 assumptions about the behavior of the enterprise. First of all, each company focuses on maximizing profits. At the same time, the company believes that if it changes the volume of its output, another organization will retain its own at the current level. In such conditions, equilibrium in the market is achieved in the following way. Let's say sellers A and B are present in the region. They sell identical goods. For other entities, market entry is closed. Suppose enterprise A begins to produce goods first. It captures the entire market and suggests that there will be no competitors. In such a situation, the company behaves like a monopolist. However, immediately after the start of production, company B appears on the market. It believes that company A will not change the volume of output that has been achieved. Company B will increase supply. This, in turn, will provoke a decrease in the price of products. Enterprise B will periodically increase its volume, while firm A will decrease it. The final equilibrium output for each company will reach 1/3, and the total production volume 2/3 competitive.
findings
It can be seen from the above description that duopoly is such a situation in which one of the firms chooses the output volume that maximizes its income. After this, the second enterprise, believing that the level of production will be unchanged, establishes its own, aimed at obtaining the greatest possible profit. This process proceeds in stages until companies reach equilibrium.
Specificity
Duopoly is a non-cooperative equilibrium. Each enterprise makes decisions assuming the maximum possible income for certain actions of competitors. Equilibrium can be represented using response curves. The line shows the maximizing production volumes that will be implemented by one company, if the level of another company is known. The basic model predicts a downward trend in price to marginal cost as the number of sellers increases. Adding probable changes will rank oligopolistic models of value formation from competitive to monopolistic.
Stackelberg Scheme
This model is a development of the Cournot structure. The asymmetric behavior of enterprises is added to the scheme. In other words, it is assumed that some of the firms will behave aggressively, that is, become a leader. Another enterprise will be a follower (passive behavior). The leader chooses the volume of production first. He will maximize profits taking into account the issue that the follower will carry out. The first company believes that the second company also wants to get high income, but with an existing offer. This allows the leader to accurately predict the follower's output. This market interaction has the character of quantitative (non-price) discrimination by an active company. The "first move" is of key importance - the choice of the volume of production and, accordingly, the cost of the goods.
Alternative option
The advantage of the Stackelberg scheme is that companies compete in quantitative terms. Meanwhile, in reality, firms are trying to fight for prices. These considerations raise doubts about the results of implementing the equilibrium volume model. The French economist Bertrand criticized Cournot's structure. He proposed an alternative, which is based on the following assumptions. If companies sell homogeneous products, then consumers will purchase them from the company that sets a lower cost. In addition, enterprises determine prices, and the market determines the volume of output. In accordance with the model, each company sets a value that maximizes profits. However, she believes that the price of a competitor’s product will be unchanged. It is due to this that the market is moving towards an equilibrium state, in which none of the enterprises wants to adjust the value of the product.