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David answered on
Dec 21 2021
Duopoly and Monopoly Market Structures
Running Head: DUOPOLY AND MONOPOLY MARKET STRUCTURES
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DUOPOLY AND MONOPOLY MARKET STRUCTURES
Duopoly and Monopoly Market Structures
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Institution
Duopoly and Monopoly Market Structures
Duopoly market structure refers to a market or industry where there are only two major rival companies that control the stakes in the market. The two firms in the markets have some strong market power since they determine the amount of output that in the market. Monopoly market structure on the other hand refers to a market or industry where there is only one firm. This firm determines the output and the prices of products in the market (Mankiw, 2009).
There are various factors that distinguish between a duopoly market structure and a monopoly market structure. Firstly are the firms in the industry. A monopoly market structure has only one sole player in the market unlike a duopoly market structure which has two players (Chen & Riordan, 2009). Second is competition. In a monopoly market structure there is no competition since the firm is all alone and therefore can the price charge for a given good or service, and the quantity to be produced. This is unlike a duopoly market where there are two firms which experience some of form of competition to a small extent. Normally since there are only two firms, the action of one firm influences what they other will do. Otherwise one will risk losing sales to the other (Chen & Riordan, 2009). While the market power possessed by the two firms would tend to result in lower output production and higher prices, the particular incentives to cheat for the firms is most likely to reduce this impact relative to a monopolistic market structure. This implies a monopoly market structure would charge higher prices and control the amount of output in the economy more effectively than would duopoly firms (Andriychenko, Girnius & Saha, 2006, p. 374).
A third factor is strategy. Unlike a monopoly firm which chooses to maximise its profit where the marginal revenue is equal to the marginal cost (MR=MC), for a duopoly firm, one of each firms are strong to impact the entire market. A firm hence needs to effectively respond to the choices of its rival firm for it to survive in the market. Hence it needs to employ strategic thinking in its decisions (Chen & Riordan, 2008; Spiegel, Ben-Zion, Tavor & Templeman, 2008). Normally, within a duopoly market, firms can interact in two ways; collude in order to maximise the joint profits of the firms or not cooperate and each firm simply act for its own interest. There is often tension between these two. If the firms decide to limit their outputs and charge high prices to get more profits, either of the firms would also have the incentive to increase their output to make more sales without the other one knowing. Hence, in duopoly market, each of the firms need to reach a combination of strategies where no firm has any other alternative strategy that would provide them the incentive to cheat taking into account the strategy chose by the other firm. At this level, the firms are said to have reached the Nash equili
ium (Andriychenko, Girnius & Saha, 2006, p. 377).
Finally other factors distinguishing between a monopoly and duopoly are the price and output effects in each of the markets. Within a duopoly market structure, the price effect is lower than in a monopoly market structure since when a firm sells one more unit of output, their price for all the other outputs that the firm sales declines. On the other hand, since selling one more unit output at Nash equili
ium still allows a firm to receive the market price value for that output. Where the price is above the marginal costs, more output would tend to be produced, unlike in monopoly competition where as the price approaches the marginal cost, output is maximised (Chen & Riordan, 2008).
Home Country Industries Representing Duopoly and Monopoly
Monopoly – Beer industry: Bavaria S.A.
An industry in Colombia representing a monopoly is the beer industry with the single dominant player Bavaria S.A. with about 98% of the beer market share. Bavaria S.A. owned by SAB Miller provides different
ands of beers for different customers in the market, from high premium beers to low cost affordable beers. Some of its
ands include Aguila, Pilsen, Cali and Costena, as well as sophisticated
ands such as Italian Peroni (Helm, 2011). Bavaria sales increased by 5% in 2011, and are projected to further increase as Colombia’s economy expands (Euromonitor International, 2012). With a market share of 98% and the fact that other smaller craft beer companies in the industry such as Bogotá Beer Company and 3 Cordilleras do not produce strong perfect substitutes for Bavaria S.A.’s beer, then Bavaria S.A. is virtually a monopoly (Helm, 2011).
Oligopoly – Telecommunication industry (Mobile Phone Operator industry): Claro (Comcel/Telmex) and Movistar
An industry in Colombia representing a duopoly is the telecommunication industry in mobile phone operators with two of the biggest players in the industry being Claro (Comcel/ Telmex) from the Mexican company America Móvil and Movistar from the Spanish group Telefónica de Móviles. Although there are other players in the telecommunication industry such as Tigo, UNE, Avantel, Virgin mobile among others, Claro and Movistar are the two dominant operators in the industry with Claro having about 62.38% of the market share and Telefonica’s Movistar having 24.66%, and the next operator being Colombia Movil with 12.43%. The rest of the market share is shared among other smaller mobile phone operators (Vive Digital Colombia, 2012, p.13). From the market share, it can be noted that the Claro (Comcel) and Telefonica’s Movistar have the highest market share and influence.
Key Characteristics in Each Industry In Relation To the Factors That Distinguish Monopolies from Duopoly
The beer industry and the mobile operator industry in Colombia have various market structure characteristics that make them monopoly and duopoly respectively. First and foremost is the number of dominant firms in the industry. As noted above, the beer industry in Colombia has one dominant company in the industry that triumphs over the rest of the smaller industries. While in reality no pure monopoly exists in the world, in an industry where a...