Why is collusion desirable to oligopolistic firms?

• A. It enables firms to produce at the lowest possible average cost.
• B. It ensures that firms can freely enter and exit the market without barriers.
• C. It guarantees that each firm will have a monopoly in its own market segment.
• D. It allows firms to increase their joint profits by reducing competition and setting higher prices.

Answer: (D)

Verified step by step guidance

1. Understand the nature of an oligopoly: a market dominated by a few firms whose decisions affect each other.
2. Recognize that in an oligopoly, firms face a strategic interdependence, meaning each firm's profit depends on the actions of others.
3. Define collusion as an agreement among firms to coordinate their actions, typically to restrict output or fix prices.
4. Explain that collusion reduces competition among firms, allowing them to act like a monopoly and set higher prices than in a competitive market.
5. Conclude that by colluding, firms can increase their joint profits because they avoid price wars and share the market more profitably.