twofirm

Twofirm, or two-firm market, is the economic term for a market structure dominated by two firms, also known as a duopoly. In theory, two-firm models explore strategic interaction between the two firms under different assumptions about product type and information.

Common models include Cournot duopoly, which analyzes competition in quantities with simultaneous moves; Bertrand duopoly, which analyzes competition in prices with identical products and, under certain conditions, can lead to price equalization at marginal cost; and Stackelberg duopoly, which introduces a leader-follower dynamic where one firm moves first and the other follows. Outcomes depend on the model: in Cournot, equilibrium quantities and profits depend on each firm’s reaction function; in Bertrand with homogeneous products and perfect information, price tends to marginal cost, leaving zero profits; with product differentiation or capacity constraints, profits can be positive.

Product differentiation, capacity constraints, and demand asymmetries can produce a range of equilibrium outcomes. Implications of two-firm competition include the potential for outcomes that resemble either competitive markets or monopoly-like profits, depending on constraints and strategic behavior. Policy relevance arises in antitrust analysis, where authorities assess the competitive effects of duopolies and the potential for tacit or explicit coordination in entry or mergers.

Limitations include that many real markets involve more than two firms or asymmetries, and that dynamics such as entry, innovation, and evolving preferences can alter outcomes. See also: monopoly, oligopoly, duopoly, Cournot competition, Bertrand competition.