India's economic landscape is undergoing a subtle yet significant shift: a drift towards market duopolies. This trend, where two dominant players control a substantial portion of a sector, is becoming increasingly apparent across various key industries, raising concerns for investors and policymakers alike.

The Rise of Duopolies

In sectors like aviation, food delivery, and digital payments, the market is consolidating, with the top two companies holding a near 90% market share. The airline industry, for instance, is dominated by IndiGo and the Air India-Vistara combine. This level of concentration is also evident in the telecom, cement, steel, and tyre industries. This increasing market concentration is reflected in the rising Herfindahl-Hirschman Index (HHI), a key measure of market concentration, in these sectors. An HHI above 1800 generally indicates a highly concentrated industry.

Implications for Investors

The emergence of duopolies presents both opportunities and risks for investors. While dominant players may enjoy higher profitability due to reduced competition, the long-term effects of limited competition can stifle innovation and potentially harm consumers. A concentrated market weakens the motivation to innovate. With reduced consumer choice and potentially higher prices, the market efficiency that capitalism promises can turn into a soft monopoly power shared between two giants. Investors need to carefully assess whether the short-term gains from investing in these dominant players outweigh the potential risks associated with reduced competition and innovation.

Factors Contributing to Duopoly Formation

Several factors contribute to the formation of duopolies in India. High capital requirements, like those in the aviation and telecom sectors, create barriers to entry for new players. Network effects, where the value of a service increases as more people use it, also favor larger companies. Moreover, regulatory systems that unintentionally favor incumbents and limited access to finance for new players further accelerate duopoly formation.

Government Intervention and the Way Forward

Recognizing the potential risks, the government is starting to intervene to foster new competition. However, the government's ability to directly address this issue is limited by its economic policy model, which emphasizes facilitating business rather than competing with it. While the government can regulate, levy penalties, or encourage new entrants, creating state-run competitors would contradict its liberalization framework. To counter duopoly risks, the government could establish a framework to identify and address concerning market concentration, using indicators such as combined top-2 market share, HHI, and the frequency of exits or bankruptcies in a sector.

India's economic growth remains strong, with projections estimating continued growth in the coming years. However, to ensure sustainable and inclusive growth, it is crucial to address the trend of market consolidation and promote a competitive landscape that fosters innovation and protects consumer interests. By empowering new entrants, enforcing competition, and redesigning market structures, India can build vibrant industries that truly support its economic ambition.