a) Provide an example of an oligopoly and illustrate how it fits each of the three market criteria

a) An oligopoly is a type of market structure that needs to meet the following criteria. First, there should be a small number of firms that offer differentiated products (generally between 2 and 10). Second, there are some barriers to enter the market which gives the possibility of obtaining positive economic profits. Third, there should be interdependence of firms. One example of oligopoly is the automobile industry. The automobile industry in the U.S. is composed of companies such as Chrysler, Ford, GMC, and Toyota. The barriers to entry are relatively low when it comes to the initial investment, government regulations, and technology. Additionally, the decision to increase or decrease the prices from one competitor will affect the whole industry which shows interdependence.

b) The main problems faced when a cartel is formed, are the price-fixing agreements and the individualistic behavior of the firms. Cartels are very difficult to maintain because some competitors might set prices differently from others in order to increase their market share. However, this individualistic behavior leads to a general reduction in profits in the whole industry. That is to say, the self-interest is greater than the cooperation between firms.