11. 4 Oligopoly in Practice
We have examined the incentives for firms in an oligopoly to cooperate
and the incentives for firms to cheat on any cooperative agreement. We
can now look at the behaviour that we actually observe among
oligopolists. How do they cooperate? How do they compete?Cooperative Behaviour
When firms agree to cooperate in order to restrict output and raise prices,
their behaviour is called collusion. Collusive behaviour may occur with
or without an explicit agreement. Where explicit agreement occurs,
economists speak of overt or covert collusion, depending on whether the
agreement is open or secret. Where no explicit agreement actually occurs,
economists speak of tacit collusion. In this case, all firms behave
cooperatively without an explicit agreement to do so. They merely
understand that it is in their mutual interest to restrict output and to raise
prices.Explicit Collusion
The easiest way for firms to ensure that they will all maintain their joint
profit-maximizing output is to make an explicit agreement. Such collusive
agreements have occurred in the past, although they have been illegal
among privately owned firms in Canada for a long time (with some