One possibility is that the two firms may collude in order to increase their combined earnings. A cartel is the most powerful kind of collusion: a group of producers who have agreed to work together to limit output and raise the price, and therefore profit.

The Organization of Petroleum Exporting Countries is the most well-known cartel in the world (OPEC). OPEC is a cartel made up of governments rather than corporations, as its name suggests. There's a reason for this: cartels between businesses are illegal in the US and many other countries.

The negative pricing effect explains why a monopolist's marginal revenue is lower than the market price. When it comes to the price effect of expanding production, however, a business only considers its own units of output, not those of its fellow oligopolists. In the case of lysine, if one business decides to manufacture more lysine, both duopolists experience a negative pricing effect.

Firms have an incentive to cooperate if they can because collusion is ultimately more profitable than noncooperation. One method to do so is to formalize it—sign an agreement (perhaps even a legal contract) or provide financial incentives for businesses to set high pricing. Firms in the United States and many other countries, however, are unable to do so—at least not legally.

A pact between companies to keep prices high would be unenforceable, and it might land you in jail. The same may be said for an unwritten agreement.

In reality, competing CEOs seldom meet without the presence of attorneys, who ensure that the topic does not go off into improper areas.

A series of meetings between Monsanto and Pioneer Hi-Bred International, two firms that control 60% of the US maize and soybean seed industry, alerted the Justice Department. These firms, who were participants in a genetically modified seed license arrangement, maintained that no illegal price-fixing talks had place during those sessions

However, the fact that the two companies negotiated rates as part of the license arrangement prompted the Justice Department to take action.

As we've seen, oligopolistic businesses might sometimes just flout the regulations. But, more often than not, they devise tactics to make the best of the situation based on what they know or think about the conduct of the other businesses.

In certain situations, oligopolists would continually undercut one another's pricing, charging a little less to steal their clients, until the price approaches the level of marginal cost, as it would in perfect competition.

Oligopolists, understandably, would like to avoid direct price competition, which would result in them making no economic profit.

The term, Game theory refers to deals with any situation in which the reward to any player—the payoff—depends not only on his or her own actions but also on those of other players in the game. In the case of oligopolistic firms, the payoff is simply the firm’s profit.

Producing distinct items rather than perfect replacements is one approach for reducing competition. Another strategy for avoiding the profit-stifling impacts of competition is collusion. Price rivalry among oligopolists may be fierce in the absence of cooperation, as seen by the recent ticket battle between Jetstar and Virgin Blue, which resulted in $300 prices to Bali.

When there are just two participants, as in a lysine duopoly, the dependency between them may be represented by a reward matrix in which each row corresponds to one player's activity and each column to the other's action.

These payoffs demonstrate what we found in our prior analysis: if both businesses generate 30 million pounds, their joint profit is maximized. However, if one business generates 40 million pounds while the other produces just 30 million pounds, either firm can improve its earnings. However, if they both create more, their earnings will be smaller than if they both reduced their production.

Payoff matrices can be used to evaluate any number of games performed by individuals or businesses. Many of these games have equilibria that are different from what illustrates the impression in the state of a prisoners' dilemma.

The numbers in the matrix indicate the players' happiness levels, which are expressed in utils. The utility levels are impacted by the location as well as the presence or absence of the other player in each scenario.