Duopoly

Duopoly is a market situation in which there are only two sellers of a particular product. Both the sellers are completely independent and no price or output agreement exists between them. The number of sellers being only two, each one of them is quite influential in the sense that a price change by one of them is bound to have its effect on the sale and the price policy of the other. Therefore, each seller, while deciding about his price and output policy of the take into account the effect of his policy on his rival and, in turn, the reaction of his rival on his  own policy. Thus, each seller in seeking to maximize his profits has to look into total consequences of his move. He must consider not only what the rival is doing now but also what he will be forced to do in the wake of changes which he himself is contemplating.

Due to uncertainty of the behaviour of the rival firm, it is difficult to make any assumption about demand conditions under duopoly. Under oligopolistic conditions there is no such thing as an objective average revenue (demand) curve for the individual firm’s product. If both the firms are producing identical products, consumers will be indifferent between the goods of the two firms. But how many of them would buy from firm A, can be known only when we know what price firm B is charging, whether it charges more than or less than firm A. and B would not fix its price unless it knows what price A intends to charge. Therefore, we cannot draw a demand curve for A’s product unless we know what B would charge. Thus, it is difficult to know what price will prevail in the market. A will not know what price B is charging unless he sets his price and B will buy from one with a lower price and therefore the other will be obliged to reduce his price to a level equal to or lower than that of the first seller. Maybe a common price is reached after a bitter price war its period of grave uncertainties.

These uncertainties of the behaviour pattern, the unpredictable reaction of the firms to each other’s policies coupled with the absence of any objective demand function for each firm make the systematic analysis of the equilibrium of a duopolistic firm extremely difficult. Under such conditions, there may be a wide variety of price output patterns depending upon whether the duopolistic firms continue engaging in cut with each other to have a common price policy. Thus, the price and output position of the duopoly firms is regarded as indeterminate since there is no common uniform solution.