Final answer:
Product differentiation in monopolistic competition makes collusion difficult and often leads to competition instead, as firms strive to create a recognizable brand and capture market share. High branding costs, innovation incentives, and the threat of legal action against collusion encourage competitive behavior among firms.
Step-by-step explanation:
The industrial characteristic that makes collusion difficult but leads to competition is product differentiation, especially in the context of monopolistic competition that can verge into oligopoly.
For instance, new entrants trying to compete with brands like Coca-Cola or Pepsi find it challenging not because of production issues but due to the significant marketing and brand creation efforts needed.
High costs in creating a strong brand presence lead to competition rather than collusion, as firms are driven to innovate and differentiate to capture market share.
Collusion occurs when oligopolistic firms act together to reduce industry output, set higher prices, and share profits, potentially forming a cartel.
However, due to various factors including economic changes, legal and political pressures, and the tendency of firms to increase output for a greater market share, sustained collusion is challenging, and firms often resort to competition.
This can result in market outcomes similar to those in highly competitive industries.
Monopolistic competition fosters incentives for innovation but does not lead to production at the lowest average cost.
It also potentially leads to excessive spending on marketing, which can be economically inefficient.
Moreover, attempts at collusion in an oligopoly could bring legal repercussions and damage to the brand if discovered, further incentivizing competitive behavior over collusion.