Final answer:
Companies in an oligopoly practice collusion when they cooperate to set fixed prices and control output, resembling a monopoly. They can form a cartel for a more formal agreement. This balance of competition and cooperation defines the market dynamics within an oligopoly.
Step-by-step explanation:
When companies that form an oligopoly collaborate to set or fix prices at a given level, they are engaging in collusion. This behavior is similar to creating a monopoly, which allows these firms to control industry output, raise prices, and share the profits without considering the welfare of consumers or the competition laws in many jurisdictions. A more formal arrangement where firms agree to act collectively to restrict output and fix prices is known as a cartel. Such conduct is seen across various markets, with classic examples like the OPEC oil cartel.
Indeed, in an oligopoly, businesses are interdependent; fluctuations in one firm's price or output can significantly impact others. If one firm in the collusion attempts to increase its price, others may not follow, resulting in a loss of market share for the first mover. Conversely, if a firm cuts its prices, others might reduce theirs as well, to maintain competitiveness, leading to minimal gains. This delicate balance often prevents companies from altering prices drastically. The LibreTexts reference underlines that although oligopolies can be tempted to cooperate to maximize profits, they can also engage in fierce competition for market share, impacting the market dynamics substantially.