Definition of duopoly – In the world of economics and politics, perhaps the term duopoly is not so foreign. This is because usually a duopoly will involve the role of government officials in a country.
If we look at it together in terms of its name, a duopoly can be described as something that will be done by two parties. Maybe those of you who are often involved in the world of government and economics have heard the term duopoly.
However, most people who are not directly involved in the world of economy or government will not know what is called a duopoly. Or maybe you just know the term without knowing what duopoly actually means. On this occasion, we will discuss more about duopoly, from its definition to its characteristics.
Definition of Duopoly
The first thing we will learn together is the meaning of duopoly. Duopoly itself is a market structure that basically consists of only two producers or sellers. Because it will also make a basic form of oligopoly competition so that in the end it will happen that the two components in it will provide services to many buyers and will sell goods and services which will compete with each other.
In a duopoly market, the two producers will have a fairly high level of strategic dependence, especially in terms of making business decisions. For example, in the process of determining the price and type of production to be carried out.
Then, the competition output that occurs also depends on the business competition side. For example, under the Cournot model, the basis of competition that will be used is the quantity of output that can produce high prices and output between monopoly markets and perfect competition markets.
In order to gain market power and profits, it is usually possible for the two producers to carry out a collusive cooperation.
After knowing the meaning of duopoly, next we will study the type of duopoly itself. There are at least two types of duopoly namely cournot duopoly and bertrand duopoly. Each type of duopoly certainly has its own characteristics.
Therefore, in order for you to understand more about the two types of duopoly, here is a complete explanation.
1. Duopoly Courtnot
The first type is cournot duopoly. The name Duopoli Cournot itself is taken from the name of the French mathematician and philosopher, Antoine Cournot.
Duopoly Cournot explains that quantity determines the competitive process that occurs in the market. Thus a competitive output will emerge. Later the two companies or producers will carry out the production process at a level that can maximize profits and choose output simultaneously.
Then, each company will produce according to the quality of competitors and market supply. Both will have an assumption if the competitive output does not change.
The Duopoly Cournot type assumes that the players will not evolve. Where when the market has reached equilibrium, each company will have no incentive to change output or price.
In fact, when it comes to companies, these changes will not make any company better. Therefore, in the long run, output and prices must also be stable. The results of Duopoly Cournot competition or output and prices will be between market equilibrium under conditions of perfect competition and monopoly.
2. Duopoly Bertrand
French mathematicians and economists provide a critique of the competitive basis of the Cournot model. He explained that price is a factor that can determine competition, not about the quantity of output.
Under the Duopoly Bertrand model, each company will have the view that consumers will choose the company that can provide the best or cheapest price because the products on the market are identical.
Therefore, when one company carries out a price reduction process, other players will also take the same steps to avoid losing their target market. A price reduction by one company that has emerged can lead to a price war in the market.
Where later the price war in the market will continue. When the price is still above the marginal cost, then each company will still benefit and still have the potential to reduce prices further.
This will later be able to reach an equilibrium when the price of the two companies will be the same, namely equal to the marginal cost.
Similar to the Cournot Duopoly model, Bertrand’s Duopoly model also assumes a homogeneous product when companies do not build collusion.
Duopoly Basic Theory
The existence of the duopoly theory was first explained by Antonia Agustin in 1838 with the title ” Researches into the Mathematical Principles of the Theory of Wealth “. Where the existence of the theory is perfected by Bertrand Edgeworth.
The duopoly market theory itself explains that if there are only two producers selling products or only company A and company B. If the goods sold are assumed to be homogeneous, then the policy to be taken by company A will also have an impact on company B and vice versa.
Therefore, both entrepreneur A and entrepreneur B must also be careful in determining the policies they will use, especially when determining selling prices and production capacity.
1. Duopoly Cournot Market Theory
In Cournot’s Duopoly theory, two productions will be considered capable of producing goods with homogeneous properties. Meanwhile, the main assumption used by Cournot’s Duopoly theory is when a duopolist will try to maximize his profits.
Meanwhile, the number of products to be produced by competitors will not depend on the amount produced by the first entrepreneur.
In Cournot’s Duopoly theory, the market demand function can be formulated as follows.
Py = f (YES + YB) which,
Py = Price of homogeneous goods sold
YES = Total goods produced by duopoly entrepreneur A
YB = Total goods produced by duopoly entrepreneur B
Then the profit that will be obtained by each duopoly entrepreneur can be formulated as follows:
Πa = YES . Py – CA(YES)
Πb = YB . Which Py – CB(YB),
CA(YES) = Cost of entrepreneur A in producing YES
CB(YB) = Cost of entrepreneur B in producing YB
2. Kinked Demand Curve Theory
Next, there is the Kinked Demand Curve theory or what is commonly called the broken demand curve theory. Where in the broken demand curve theory there are several assumptions needed.
a. First assumption
The first assumption of the broken demand curve theory is when a market price that satisfies the two duopolists has been established. For example PY rupiah.
b. Second assumption
The second assumption of the broken demand curve theory is that when one of the producers in the duopoly market starts to lower its selling price or the price is lower than the PY equilibrium price above, then the competing entrepreneur who knows about the policy will also reduce selling price which can be even lower.
This is done so that competing entrepreneurs do not lose buyers and because of this, price competition occurs which in the end can also destroy the two duopoly companies.
c. Third assumption
The third assumption of the theory of a broken demand curve is that when one of the duopolists does not take action to increase their sales price, then this action will not be followed by rival entrepreneurs which can result in some or all of their buyers switching to competing entrepreneurs who do not participate in increasing their prices. price.
From the existence of several assumptions as explained above, a broken demand curve will be formed because the above conditions can indeed cause a price condition in the duopoly market that is not easy to change.
PY = Price formed for each product unit (Rupiah)
Y1 = Running production capacity at PY price
D = price equilibrium point and production capacity
According to the theory assumption that a broken demand curve can be explained if a company lowers its selling price lower than PY, it will cause other companies to follow suit. Where the purpose of other companies to follow these actions is so as not to lose buyers.
From this assumption, a demand curve for entrepreneurs who reduce prices will be the DE curve. Where later the elasticity of demand for the DE curve will be the same as the elasticity of demand in the market. This could happen because of the price reduction action that was also followed by rival entrepreneurs.
Meanwhile, the opposite condition will occur when a company will increase selling prices with conditions that are higher than PY and followed by other companies. This condition will cause the formation of a DF curve with the same elasticity as the elasticity of market demand.
Even so, the assumption above also explains that if the price increases that occur are not followed by competing companies, then the curve that is formed is not the DF curve but the DC curve.
Where the DC curve itself will have a greater elasticity of demand than the elasticity of market demand. The cause of a broken demand curve for a duopoly entrepreneur is due to an action to increase prices which apparently is not followed by competing companies.
When this happens, the marginal product value curve or MR for duopolists is CABG. In addition, there is an increase in price, so the firm’s demand curve is not PYD. This can happen because not all buyers will leave entrepreneurs who raise prices.
This can happen because there are still some buyers who will indeed stay because they don’t know if rival companies don’t increase their prices.
Another reason is because of the homogeneous nature of a product that is sold, so that consumers continue to make purchases from certain entrepreneurs even though they raise their selling prices.
This is why the demand curve will not turn PYD into a DC curve.
In practice, it turns out that duopoly is part of the economic field which includes several things and scope. In this case, several things that become the scope and scope of the duopoly market are price determination and production capacity.
In addition, the scope of the duopoly market also includes the quality of the products offered by the two producers to all consumers. Therefore, what will be involved in duopoly practices will really relate to products and consumers and also all things that support these activities or practices.
Duopoly and Oligopoly Relations
The practice of duopoly turns out to be part of the practice of oligopoly. As with duopoly, the term oligopoly is still very foreign because it may not be as well known as the term monopoly. In simple terms, oligopoly is a market condition that will be controlled by producers who can produce products in small quantities so that in the end the existence of these products will be needed or desired by consumers.
Because it is possible in a duopoly practice that has two producers to be able to produce a product in limited quantities but it is really needed by the market. This is what will make the two producers able to dominate the world market because they are able to influence consumers to depend on the products they produce.
Just like monopoly or oligopoly, the existence of a duopoly can also have a certain impact. For example, with the emergence of two producers who have been able to dominate the international market so that in the end other companies will not be able to become competitors to these two companies.
In addition, it is possible that in the end the two producers who are able to dominate the market will play price games so that the prices of products on the market will suddenly rise higher.
Duopoli also has its own characteristics. So, if you don’t really know what characteristics a duopoly has, here’s a complete explanation.
1. Producers Will Have High Strategic Dependence
The first characteristic of a duopoly is that two producers will have a higher dependence on the strategy. Actions and strategic decisions by one company will also have an impact on other companies.
2. There is a high chance of collective behavior
The second characteristic of duopoly is the occurrence of high collective behavior. This happens because the two of them will be interdependent so that in the end both of them are likely to evolve to be able to secure higher market profits.
3. Increasingly Fierce Level of Competition
The occurrence of more fierce competition is also one of the characteristics of a duopoly. This could happen because the two companies did not collude. Regulators will carry out stricter monitoring of the market to avoid anti-competitive practices.
Therefore, the strict supervision of the regulator will prevent the two companies from evolving.
4. Significant Monopoly Power
The occurrence of more significant monopoly power is one of the characteristics of the next duopoly. Not only from market supply, but the company’s condition also allows it to adopt a differentiation strategy.
When a company decides to adopt a differentiation strategy, each product will be able to have several loyal customers to generate significant monopoly power.
5. Higher Entry Barriers
Barriers to entry could be higher and may stem from structural barriers. This also seems to be inherent in the natural characteristics of the market such as economies of scale and mastery of output and distribution networks. Or it could also be that the two companies will deliberately build barriers to entry such as through the lowest price strategy and brand loyalty.
6. More Significant Economies of Scale
Each company will be able to enjoy higher sales because the market will only be inhabited by two companies.
Well, that’s an explanation of duopoly that you can read. Starting from the definition of duopoly to its characteristics, it has been explained in full here. Hopefully all the discussion above is useful as well as add to your insight.