Oligopoly is a market form in which a few sellers dominate the market. In a collusive oligopoly all the sellers work together – by fixing prices and controlling supply - to ensure maximization of profits. The best example of a collusive oligopoly is Organization of the Petroleum Exporting Countries, OPEC.
Not just the number and size of firms but how they behave influence the degree of imperfect competition in a market. When only a few firms in a market, they see what their rivals are doing and react. For example, if there are two airlines operating along the same route and one raises its fare, the other must decide whether to match the increase or to stay with the lower fare, undercutting its rival. Strategic interaction is a term that describes how each firm's business strategy depends upon its rival's business behavior. When there are only a small number of firms in a market, they have a choice between cooperative and no cooperative behavior. Firms act non-cooperatively when they act on their own without any explicit or implicit agreement with other firms. That's what produces price wars. Firms operate in a cooperative mode when they try to minimize competition between themselves. When firms in n oligopoly actively cooperate with each other, they engage in collusion. This term denotes a situation in which two or more firms jointly set their prices or outputs, divide the market among them, or make other business decisions jointly. During the early years of American capitalism, before the passage of effective antitrust laws, oligopolists often merged or formed a trust or cartel.
