As we have seen before, acting as a monopoly allows an oligopolistic industry to set their price above marginal cost which in turn allows them to achieve maximized profits. However the colliding problem of economic cooperation and the individuals motivation by self-interest is a resurfacing issue that many oligopolists struggle to deal with. If firms decide not to work as one and compete with one another then this results in higher yields but lower profits.
For an oligopoly to succeed then a cartel must be formed and a collusion must be drawn up.
Collusion- A contract between firms where they agree on a fixed price and output quotas to produce. Here the firms act as a monopoly, which then results in maximized profits. However, this conduct is said to be illegal in the U.S. , UK and in Europe.
Cartel- In order to draw up a collusion a cartel must first be formed. A cartel is a group of firms acting as one (monopoly). This allows each of them to achieve monopoly profits.
If firms decide not to work as one and compete with one another then they must consider two effects when deciding upon their strategy:
The output effect: In order to increase profits the price must be set above marginal cost
The price effect: If higher yields are produced this will then lower the overall price of the product which in turn will lower profits.
THE EQUILIBRIUM FOR AN OLIGOPOLY
Nash Equilibrium- A theory developed by John Nash which describes a situation where firms who are working together all decide on their best strategy based entirely upon the tactics that the other firms who they are acting with have selected.
Here is a clip from the film 'A Beautiful Mind' based on John Nash where we see how his theory of Nash Equilibrium came about, where he and his friends find themselves attracted to the same woman.
http://www.youtube.com/watch?v=CemLiSI5ox8