Final answer:
Competitive oligopolists reduce uncertainty through collusion, cartels, price leadership, and non-price competition. These strategies help to stabilize markets, prevent price wars, and allow firms to earn more predictable profits by reducing direct competition.
Step-by-step explanation:
Competitive oligopolists can reduce the uncertainty they face in imperfectly competitive markets by engaging in collusion, forming cartels, practicing price leadership, or establishing non-price competition strategies. Since oligopolies are characterized by a small number of large firms that dominate the market, these firms have a significant degree of market power and can set prices above marginal costs. However, these actions come with trade-offs such as potential legal issues and the instability of collusive agreements in the long run.
Collusion involves an agreement among firms in an oligopoly to limit competition between themselves, which can lead to higher prices similar to those found in a monopoly. Cartels are formal agreements to collude on decision-making regarding pricing, production, and other important market factors. Price leadership occurs when a dominant firm sets the price which other firms then follow. Non-price competition strategies involve differentiating products through branding, quality, and features rather than competing on price, making demand for each firm's product less sensitive to the price changes of competitors.
The main reason oligopolists engage in these practices is to gain more predictable profits by reducing the risks associated with price wars and the uncertainty of the reaction of competitors. By coordinating their strategies, they can avoid mutual detrimental competition, which could lead to lower profits for all involved.