Competitive markets are a must: India should beware the rise of duopolies across its economy

The challenge of regulation: Economic theory on market behaviour under a duopoly is subsumed in the larger literature focused on economic dynamics under an oligopoly (few sellers).There has been extensive oligopoly research; the problem is not paucity of theory or models, but the lack of a model that predicts firm behaviour in particular contexts with accuracy and reliability.This is required, as it could form the basis for policy decisions on whether, how and under what circumstances the government ought to intervene with regulatory measures.Empirical research shows that firm performance varies along a continuum bound by perfect competition and perfect monopoly, but not in predictable ways. Thus, the difficulty in formulating useful public policy interventions is that duopoly behaviour is highly circumstantial.

Regulation should be based on an indepth consumer-welfare-oriented cost-benefit analysis of the behaviour of firms in duopoly markets, while acknowledging well-known infirmities of government efforts to manage competitive processes.Regulatory issues get entangled with corporate governance when duopoly firms employ a manager who has partial ownership. In such situations, a tendency to raise prices and decrease quantities can make a duopoly act like a monopoly.With very little rivalry, the incentive to aggressively lower prices diminishes and consumers might find fewer options and potentially pay more than they would in a competitive market.

Interventions to regulate prices become important.Innovation may be another area for intervention. Under a duopoly, a firm typically innovates just to maintain a lead, rather than to secure itself from being outmanoeuvred by a fresh firm.