Why does cooperation among rivals occur most often in oligopolies?
Cooperation is difficult among the large number of firms in perfectly competitive or monopolistically competitive markets: too many sellers have to be organized to make cooperation practical. Cooperation is an integral part of oligopoly because there are only a few interdependent firms. In a price-leadership oligopoly, a dominant firm decides on prices and price changes and other firms follow along. In a cartel, independent firms organize themselves and agree on prices and production limits. Several other facilitating practices can be used to increase cooperation among firms, including cost plus/markup pricing to ensure that firms with the same costs charge the same price, and most-favored-customer (MFC) policies, which discourage selective price cutting.
