Discuss. To understand what the question is asking, a definition of an oligopolistic market is required before I will attempt to answer. An oligopolistic market is characterized by few firms and many buyers, there are a sufficiently small number of firms for interdependence to exist, meaning that each firms prospects depend on rivals as well as their own policies. This interdependence can lead to attempts at communication, coordination and collusion. All decisions made are strategic and rivals responses will have been taken into account. Each time a firm in an oligopolistic market adjusts either price or quantity, any revenue gain is at the expense of its competitors. The competitors whose profit margins are affected are likely to respond by altering their own price or quantity. From this we can understand why there is an incentive for firms to collude.

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