What is a duopoly?

A duopoly refers specifically to a market structure where only two firms dominate the industry and compete against each other. This type of market situation is a subset of oligopoly, which generally involves a few firms (but more than two) that have significant market power. In a duopoly, the actions of one firm can have a direct impact on the other, influencing pricing, production levels, and strategic decisions.

The nature of this competitive interaction leads to unique dynamics such as collusion or price wars, as each firm must take into account the potential responses of its rival when making decisions. This enables researchers and economists to explore models of competition that are particularly relevant to the duopoly setting, such as the Cournot and Bertrand models, which analyze how firms behave in relation to each other.

In contrast to the other choices, which describe different market scenarios, the defining characteristic of a duopoly lies in its two-firm structure, making it a critical concept in microeconomics as it illustrates how limited competition can operate in markets.