By acting together, oligopolistic firms can hold down industry output, charge a higher price, and divide the profit among themselves.
An oligopoly maximizes profit by equating marginal revenue with marginal cost, resulting in an equilibrium output of Q units and an equilibrium price of P. Oligopoly firms face twisted demand curves due to competition from other oligopoly firms in the market.
Firms in an oligopoly set prices collectively (in a cartel) or under the direction of one firm, rather than undercutting prices from the market. Profit margins are therefore higher than in more competitive markets.
The competitive market model is an oligopoly model based on entry and exit barriers that govern firm prices and output. If the barriers are high, the oligopoly will set a higher price.
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