Industrial organization is the field of economics which studies the behaviors of the firms when they face situations of imperfect competition.
Industrial organization does not assume the assumptions of perfect competition. It considered markets in which there are a limited number of firms which have a monopoly power. Those firms can invest to protect themselves from competition, benefit from information asymmetries, and the goods they produce are similar, but not identical.
One of the most common kind of imperfect competition is the duopoly, a situation in which only two firms control the market. In such a situation, producers have not the same strategies as when they face a larger competition. The strategy chosen in order get the higher profit possible will depend on the kind of interaction the two producers have. There are several possibilities :
- In the case of a Cournot duopoly, each producer chooses its level of production and assumes that its decision will not impact the strategy of its competitor.
- In the case of a Stackelberg duopoly, one producer (the leader) knows what will be the reaction of the second producer(the follower). He uses this advantage to choose its output before the follower.
- In spite of choosing their level of production, each producer decides the price of its good. This case is known as the Bertrand duopoly.