11.4 Oligopoly in Practice LO 5
Explicit collusion between oligopolists is illegal in domestic markets.
But it can take place in situations where firms in global markets are
supported by national governments, as is the case for OPEC.
Tacit collusion is possible but may break down as firms struggle for
market share, indulge in non-price competition, and seek advantages
through the introduction of new technology.
Oligopolistic industries will exhibit profits in the long run only if
there are significant barriers to entry. Natural barriers are most
commonly due to economies of scale. Firm-created barriers can be
formed by brand proliferation, advertising, and the threat of
predatory pricing when new entry occurs.
Evaluation of oligopoly depends on how much interfirm competition
(a) drives the firms away from the cooperative, profit-maximizing
solution and (b) leads to innovations in the very long run.