Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is the definition of a duopoly?

1. A market with many producers

2. A market with only two firms

3. A market with several parallel producers

4. A market dominated by monopolistic competition

The correct answer is: A market with only two firms

A duopoly is defined as a market structure where only two firms compete against each other. This situation leads to a unique dynamic in pricing, output, and strategies because the decisions of one firm directly impact the other. In this type of market, the two firms must consider each other's actions in their decision-making processes, leading to the potential for strategic behavior such as collusion or price wars. In contrast, a market with many producers describes a competitive environment that is not characteristic of a duopoly, which focuses specifically on just two entities. Similarly, a market with several parallel producers implies more than two participants, thus falling outside the definition of a duopoly. Lastly, a market dominated by monopolistic competition involves numerous firms that each have some control over pricing due to differentiated products, which is not aligned with the fundamental concept of a duopoly, where the scarcity of competitors is the defining feature.