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Article Title:
Why Are Duopolies So Competitive?

Article Description:
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. 

Additional Article Information:
513 Words; formatted to 65 Characters per Line
Distribution Date and Time: Tue Jan 31 23:53:40 EST 2006

Written By:     Geoff Gannon
Copyright:      2006
Contact Email:  mailto:[EMAIL PROTECTED]

Article URL:

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Why Are Duopolies So Competitive?
Copyright © 2006 Geoff Gannon
Gannon On Investing

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. 

Geoff Gannon is a full time investment writer. He writes 
a (print) quarterly investment newsletter and a daily value 
investing blog. He also produces a twice weekly (half hour) 
value investing podcast at:



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