Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is the main characteristic of a duopoly?

1. A market with no competition

2. Two firms dominating a market

3. Many firms with varying products

4. One firm controlling the entire market

The correct answer is: Two firms dominating a market

In a duopoly, the primary characteristic is the presence of two firms that significantly influence and dominate a particular market. This structure creates a competitive landscape where the decisions of one firm directly affect the other, leading to strategic interactions that can shape pricing, output, and other market factors. The actions of these two firms are crucial because they must consider their rival's potential responses, which adds a layer of complexity to their decision-making processes. In contrast, a market with no competition would indicate a monopoly rather than a duopoly. A market characterized by many firms offering varying products describes perfect competition or monopolistic competition, where the influence of any single firm is minimal. Lastly, one firm controlling the entire market pertains to monopoly conditions, where the market power is concentrated in the hands of a single entity. Thus, the defining feature of a duopoly is indeed the dominance of two firms in the market, making the choice that highlights this aspect the most accurate representation.