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

The recent IndiGo fiasco is an example. As one player in the market fails to cater to demand, the other player faces excess demand, leading to price hikes and unsatiated demand. This leads to erosion of consumer welfare and delivers super-normal profits to the rival.

These social costs and inefficiencies impose economy-wide losses. The recent episode in the airline industry needs to be taken as a warning signal for other sectors.

Like aviation, patterns of duopoly are visible in other sectors too. The trend reflects a structural shift towards more concentrated markets and rising market power. For example, in telecom, Reliance Jio and Bharti Airtel dominate India’s subscriber base and revenue market share.

Mega infrastructure businesses, especially in ports and logistics, show increasing concentration, mostly between two conglomerates. These reinforce concerns about centralized dominance in critical sectors.

In food delivery, an emerging segment of the gig economy, Zomato and Swiggy command nearly the entire online food delivery market. High sunk costs in logistics and discretionary commission-led models have made survival tough for smaller players.

Ola and Uber dominate cab hiring, while Flipkart and Amazon account for over 80% of India’s organized e-commerce market. In digital payments, PhonePe and Google Pay handle a majority of UPI transactions.

Theories in industrial organization provide insights on the rise of duopolies. One explanation notes the role of very high capital requirements that make entry and survival difficult for smaller firms. This gets more complicated when global investors prefer to fund early market leaders.

Another explanation points out the network effects in certain types of industries, which reward bigger players. In these types of industries, big firms spend early on to acquire customers, squeezing out competitors.

A third explanation focuses on regulatory gaps that allow dominance to deepen. This gets accentuated when consolidation takes place through mergers, acquisitions or takeovers of bankrupt firms.

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. This could mean incremental changes rather than disruptive.

Importantly, powerful firms often have significant lobbying power. This can make it even harder for smaller players to emerge or for disruptive technologies to gain.

If duopolization grows even as markets are deregulated to ease the entry of new players, it may in some cases point to excessive lobbying power that serves narrow interests.

With fewer competitors, 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.

A policy to address issues in innovation is another area for intervention, as innovation often serves to maintain the lead of firms, rather than being driven by the fear of being outmanoeuvred by a fresh firm. Innovation in such a backdrop can only be incremental rather than disruptive.

Importantly, these powerful firms often have significant lobbying power. This can make it even harder for smaller players to emerge or for disruptive technologies to gain.

Increased duopolization when deregulation and easing of restrictions are being undertaken points to the growth of such lobbying power, serving narrow interests.

These are the author’s personal views.

The author is director, Madras Institute of Development Studies.