What is collusion in the context of oligopoly?

Collusion in the context of oligopoly refers to an agreement among rival firms to cooperate for their mutual benefit, often to set prices or output levels in a way that increases their profits collectively. This cooperative behavior arises because, in an oligopoly—a market structure dominated by a few firms—companies recognize that their decisions about pricing and production directly affect their competitors.

By engaging in collusion, firms can avoid the pitfalls of competition that would typically drive prices down. Instead, they can work together to maintain higher prices and stable market conditions. This practice can take the form of explicit agreements, such as price-fixing cartels, or implicit understandings where firms coordinate their actions without formal communication. Such behavior can lead to higher prices for consumers and decreased overall market efficiency.

Options that suggest independent actions, competitive approaches, or efforts to undermine competitors do not encapsulate the collaborative nature of collusion, which fundamentally relies on cooperation among firms in an oligopolistic market.