Duopolies: The Unfair Growth Machines

Jan 3, 2025 8 min read

Patrick

„Gentlemen, you had my curiosity… but now you have my attention”

– Leonardo DiCaprio’s character Calvin Candie in Django Unchained

arvy’s teaser: When two giants dominate, they wield pricing power, crush weaker rivals, and leverage compound interest to outpace markets. By forming a duopoly, they build their business model like a flywheel leading to perpetual growth machines.

Duopoly.

A market where two firms dominate or control exclusively.

The other key market structures (chart 1) are monopoly (one firm in control), oligopoly (a few firms sharing control), and market leader in a fragmented market (one firm leading among many peers). These structures have my curiosity, and they should have yours, too. Why? Because for them to exist, specific criteria must be met. And history has shown that companies in these areas have been winners in the past and will most likely continue to be winners in the future. But I have not yet told you about their most attractive attribute.

They can play an unfair advantage.

Especially duopolies.

Chart 1: Type of Market Structures and How Many Sellers

Source: arvy

World’s Best-Known Duopolies

First things first, let’s look at the world’s best-known duopolies:

Airbus & Boeing: Commanders of the skies, dominating the global aircraft manufacturing market.
Apple (iOS) & Google (Android): Controlling the mobile operating system market, powering nearly every smartphone worldwide.
Cadence & Synopsys: The architects of chip design, providing software crucial for semiconductors.
Eli Lilly & Novo Nordisk: Leaders in diabetes care, driving innovation in insulin and obesity treatments.
L’Oréal & Estée Lauder: Beauty giants ruling the skincare, makeup, and fragrance markets.
Mastercard & Visa: The global duopoly of payment processing, facilitating trillions in annual transactions.
Pepsi & Coca-Cola: Rivals in the beverage industry, offering the world’s most iconic soft drink brands.
S&P Global & Moody’s: Masters of credit ratings and financial analysis, these two firms dominate the credit rating industry.

You have met many of them in your life. But how is it that these companies dominate a certain market so much?

Let’s look at how they engage in an unfair fight.

Chart 2: World’s Best-Known Duopolies

Source: arvy

Flywheel Effect Leading to Perpetual Growth Machines

How can those duopolies exploit their dominance? And why are they such attractive businesses to own (excerpt from our NZZ The Market article)?

They build their business model in these types of markets like flywheels. In theory, once a flywheel starts moving from a standstill, it gradually builds momentum. Over time, the wheel can spin on its own, creating even more momentum in a self-reinforcing loop. In practice, market leading companies can use their dominance in their industry to leverage the following three points to turn their flywheel.

Let’s take the duopoly of Mastercard & Visa, two businesses we own, as an example:

Their moat: Mastercard & Visa have a wide moat. Due to their widespread payments network they can fend off competition, creating best-in class operational efficiency resulting in high profit margins, pricing power, strong cash flows and reinvestment of their capital at high returns.
Market share gains: They cannot always beat every competitor, which causes them to target weaker competitors and avoid stronger ones (Mastercard & Visa fight smaller peers like Discover or American Express). They deliberately use their unfair advantage to take market share only from weaker competitors. This continuous fight not at eye level leads to a constant strengthening of their market dominance in their duopoly. Firms in oligopolies or market leaders in fragmented markets do the same. But if a large cake is only divided by two, you get more, which is what makes duopolies in a growing market so attractive!
The pièce de résistance lies in the third, and most significant, factor: compound interest effect. Because these businesses deliver exceptional returns on invested capital, they have the potential to become remarkable compounders. Instead of distributing dividends—which provide no return for the company and solely benefit the investor – they reinvest their earnings. This reinvestment accelerates the compounding process at a pace that many investors struggle to fully comprehend in terms of its long-term impact. By focusing only on the next twelve months, investors neglect this compounding power and often consider such businesses to be expensive. But the market leaders are essentially priced reasonably, even if they do not look that way in the present, because compound interest has such a powerful long-term effect. Conventional valuation methods simply fail. In academia, this is often explained by the «quality anomaly».

In short, companies such as Mastercard & Visa can use their dominance, based on a moat and best-in-class operational efficiency, to push weaker competitors out of the market and gain further market share. The improved profitability from market share gains leads to more capital that can be reinvested at high returns, which in turn further extends their dominance through operational efficiency and enables further market share gains. All of this happens in repeat mode (chart 3). These market leaders can use the flywheel effect to build a business model that turns them into perpetual growth machines.

The cherry on the cake is when companies are supported by structural growth trends in their sectors. Like payment processors Mastercard & Visa in the cashless payment trend.

This boosts growth rates and ultimately also the compound interest effect.

But of course, there is a catch.

Chart 3: Illustration of the Visa and Mastercard flywheel effect

Source: arvy

Time-Horizon Arbitrage

You must engage in time-horizon arbitrage.

In what?

The concept is simple, but not easy. It is about focusing on the long term, years if not decades, while most investors are fixated on short-term performance.

By extending your investment horizon, you reduce competition, as many are distracted by quarterly results, clickbait headlines, and market noise. The true advantage comes from buying undervalued assets with long-term potential and holding them for a long period of time – like businesses in duopolies, such as Mastercard & Visa (chart 4).

These companies leverage structural dominance, pricing power, and compounding growth to outperform over decades. The key is patience: hold through market fluctuations, temporary underperformance and let time work its magic. Over the long run.

I know it is easier said than done, but for now, one thing remains clear.

Duopolies first piqued your curiosity.

Now they have your attention.

Chart 4: Mastercard and Visa since going public