Final answer:
Oligopoly firms are tempted to produce more than the profit-maximizing quantity because by marginally increasing output, they hope to gain extra profit. However, if multiple firms do this, it can cause market prices to decrease, leading to a scenario where all firms potentially earn zero economic profits.
Step-by-step explanation:
Individual firms within an oligopoly have an incentive to produce more than the quantity that maximizes their joint profit due to a phenomenon similar to the Prisoner's Dilemma. While collectively acting as a monopoly may be profitable for the group, each firm faces a temptation to slightly increase their output in hopes of acquiring additional profit. This idea stems from marginal revenue analysis where a firm will continue to produce until marginal cost equals marginal revenue.
If every firm within the oligopoly decides to produce more, believing others will not, they inadvertently increase total supply, leading to a decrease in the market price. This behavior can result in a competitive environment with each firm earning zero economic profits, akin to what is seen in perfect competition.
A monopolist uses marginal revenue and marginal costs to determine its profit-maximizing output. When marginal revenue exceeds marginal cost, the monopolist will produce an additional unit. Oligopolists deviating from the group strategy and producing more erode potential monopoly-like profits.