A duopoly is a situation in which two firms control nearly all of
the market for a product or service.
Duopolies can be surprisingly competitive. If you remember that
the price of a product or service is determined solely by the
highest losing bid price and the lowest losing ask price, you'll
realize why a duopoly can be so competitive. A large number of
inefficient competitors will have almost no affect on prices in
the long run unless someone (either a government or a group of
idiotic investors) is willing to continually finance unprofitable
operations in an unprofitable industry (think airlines).
Of course, there is always the fear of a price fixing scheme in a
duopoly. Generally, however, that fear is unfounded. Human nature
suggests a price fixing scheme is far more likely to occur in an
oligopoly than a duopoly. Humans weight the fear of loss far more
heavily than the greed of gain when making calculations about the
future. In a duopoly, mistrust increases the fear of loss
inherent to any price fixing scheme (namely, the other guy will
stab you in the back). In an oligopoly, the diffusion of power
and the lack of excess capacity at any one firm makes price
fixing very attractive. Price fixing in an oligopoly is a much
safer bet than price fixing in a duopoly.
There are, of course, other reasons why a duopoly is very
unlikely to result in a price fixing scheme. In addition to a
healthy does of fear, there is an often unhealthy does of hate
in duopolies. There is always just one scapegoat in a duopoly.
Hatred is a personal emotion; if spread over too many objects it
tends to wane away. Finally, there's the simple fact that both
competitors in a duopoly are likely really big, really agile,
really cutthroat players. The process leading up to a duopoly
tends to be a sort of wolfing run, in which two pups are
separated from the runts.
Having said all that, price fixing is possible in a duopoly. Some
duopolies are not the result of competition but of
nationalization and privatization, although this is relatively
rare since a nationalized monopoly won't often result in a
lasting duopoly (it will either remain a monopoly once privatized
or get crushed by new, private competitors).
Finally, a price fixing scheme always makes more sense in a
commodity business. After all, any product differentiation limits
the degree to which general demand is applicable to specific
competitors' products. For example, Coke and Pepsi are highly
differentiated products, at least when purchased in their specific
packaging (physical differences or similarities are immaterial here;
it is only the buyer's belief that matters). I drink Pepsi, and I
can assure you (however irrational it sounds) that no drop in the
price of Coke would be sufficient to get me to stop buying Pepsi.
There is almost no other tangible good about which I could say the
same. So, clearly Coke and Pepsi are differentiated products, and
there's very little chance of an effective price fixing scheme
between them.
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