THE CASE OF DUOPOLY
Deviation from Perfect Competition
Abstraction from the homogenous-product assumption may enable the duopoly model to apply to either of wholesale loan market or retail loan market.
It may be supposed there are only two banks in the wholesale loan market - X Bank and Y Bank. One bank is offering low-interest-rateoption-free loans and another bank is offering high-interest-rate loans with foreclosure option. If the banks have any tacit agreement between them, they may not enter each other’s market, but when they do not have any and each gets the information that its product is being offered by the other, the situation is similar to the one described in Table1. The X Bank offers low-interest-rate-option-free loan and the Y Bank offers high-interest-rate-loan with foreclosure option.
If the X Bank chooses to offer the product of the Y Bank, the X Bank’s additional profit out of the loan increases to five (5), similar to the case of Y Bank. Hence, there are multiple best options in the cells containing the numerical figures (5, 5) for each bank given what the other bank is doing.
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