Capstone Project - A Study of Market Share in a Duopoly Structure

Background

In this Project, me and my group mate investigates how pricing strategies affect market share in a duopoly market, a structure where only two major firms dominate an industry. This project is specifically contextualized within Hong Kong, analyzing industries such as:

• 🚌 Bus Transport (KMB and Citybus)
• ✈️ Airlines (Cathay Pacific and Hong Kong Airlines)

🧠Concepts and Knowledge Used

1. Economic Theory of Duopoly
   • Assumes two firms, homogeneous goods, and competitive pricing.
   • Considers market share as the key metric for dominance.
2. Dynamical Systems and ODEs
   • Models the evolution of market share over time using differential equations.
   • The system tracks how one company’s pricing affects its own and its rival’s market share.
3. Gaussian Distribution of Demand
   • Assumes price–demand relationship follows a normal distribution curve.
   • Captures how far a price is from the average influences how many customers a company attracts.
4. Numerical Simulation (MATLAB)
   • Solves the differential equations under different pricing scenarios.

🧩Limitations

1. Does not model substitutes like MTR in the bus example.

2. Cannot predict absolute price levels that yield max market share — only relative dynamics.

📈 Key Insights and Results

A company should adopt aggressive pricing when the market is unstable and it seeks dominance.

When the market is stable, mirroring the rival’s pricing strategy helps maximize sustainable market share.

Consumer inertia plays a big role — customers stick with familiar options when companies behave similarly.