Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What defines a duopoly?

1. A single producer in a market

2. A market with two dominant firms

3. A market with no dominant producers

4. A market with many firms that are large

The correct answer is: A market with two dominant firms

A duopoly is characterized by a market structure where two firms have significant control over the market. This means that the decisions made by one firm will directly impact the other, leading to strategic interactions and competition between the two. In such a scenario, the limited number of firms creates an environment where they must consider the actions of their competitor when making decisions regarding pricing, product offerings, and overall market strategies. The presence of only these two dominant firms typically leads to either cooperative behavior (where they may implicitly collude to maximize joint profits) or competitive behavior that can result in price wars or aggressive marketing strategies. Other options do not capture the essence of a duopoly accurately. A single producer characterizes a monopoly, while a market with no dominant producers describes a perfectly competitive market. The option referencing many large firms points toward an oligopoly or competitive market structure, which differs from the concentrated nature of a duopoly.