1. Few large firms: each must consider its rivals’ reactions in response to its decisions about prices, output, and advertising.

2. Standardized or differentiated products.

3. Entry is hard: economies of scale, huge capital investment may be the barriers to enter.

In a non-collusive model, individual firms believe that rivals will match any price cuts and not follow their price rise. Firms view its demand as inelastic for price cuts, and elastic for price rise. This analysis explains the fact that prices tend to be inflexible in oligopolistic industries.

Game theory suggests that collusion is beneficial to the participating firms. Collusion reduces uncertainty, increases profits, and may prohibit entry of new rivals. The examples illustrated in this chapter of your textbook has provided some detail explanation of this topic. The Organization of Petroleum Exporting Countries (OPEC) is a cartel. The eleven countries agreed on the output amount and working together to control the world’s crude oil supply.

When firms form a cartel, they are acting as one entity. They will perform as they are a large monopoly, earning the highest total profit possible. However, members do have an incentive to cheat as individuals can increase their own profits by cheating.

In US, anti-trust law has set up guidelines for corporations to follow to avoid collusion of large firms in the same industry and protect consumer rights.

Since the long term profit is quit possible in this particular market structure,  firms will keep improving their products or production methods by investing in R&D developments projects. By  having new or better product or production methods, they can distinguish themselves from other firms in the same industry and earn more economic profit in long run.