If an industry is
composed of only two giant firms, each selling identical
products and having half of the total market, there is every
likelihood of collusion between the two firms. The firms may
agree on a price, or divide the market, or assign quota, or
merge themselves into one unit and form a monopoly or try to
differentiate their products or accept the price fixed by the
leader firm, etc., etc.
In case the duopolists producing perfect
substitute engage in price competition, the firm having lower
costs, better goodwill and clientele will drive the rival firm
out of the market and then establish a monopoly.
If the products of
the duopolists are differentiate, each firm will have a close
watch on the actions of its rival firms. The firms manufacturing
good quality products with lesser cost will earn abnormal
profits. Each firm will fix the price of the commodity and
expand output in accordance with the demand of the commodity in
There are four main
duopoly models which explain the price and quantity
determinations in duopoly. These models are:
(i) Classical Model
of Cournot and Edge Worth.
Spatial Equilibrium Model.
(iv) Modern Game
A very brief
explanation of these is given below:
Cournot and Edgeworth Model:
Cournot approach is
based, on the assumptions that rivals output remains the same
and one duopolists plans to change in his output. Edgeworth
model assumes that rival's price of the good to remain unchanged
as one duopolists plans a change in his price of the good.
It is based on the
assumptions that one of the duopolists is a 'Leader' and the
other is the follower.
Hotelling Spatial Equilibrium Model:
In this model, the
products of the duopolists are differentiate in the eyes of the
buyers by virtue of the location of the duopolists.
Game Theory Approach:
Whenever there are
two or a few firms competing in an industry for profit, each
firm can and dose react to the price, quantity, quality and
product changes which other firm undertakes. The duopolists or
oligopoly have a reaction function. As firms under duopoly are
independent, they, therefore, employ strategies. The competing
firm also make plans to contract and makes decisions about
output and price of the good keeping in view the strategy of its
rivals. The plans made by these firm, are known as game
strategies. The game theory model describes the firms,
interaction model. It is the analytical framework in which two
or more firms compete for economics profits that depend on the
strategy that the others employ.
All games theory
models have at least three common elements:
(a) Players: Players
in the game theory are the firms.
Strategies are the plans, the possible choices of the firms for
production of output, prices of goods, changes in the quality of
(c) Pay offs
(economic profit): These are the profits or losses realized by