The Incentive to Raise Price above Competitive Levels in an Oligopoly The competitive equilibrium is shown at P0, Q0. In the competitive equilibrium no firm makes an above-normal profit since P = MC. Even though no firm makes an above-normal profit, a competitive firm has no control over the price and thus cannot increase its profits by reducing output.
But a firm in a four-firm oligopoly who reduces quantity by the amount Q0 − Q1 increases the market price to P1 which is greater than MC. The increase in price increases the profits of the firm that cuts output (the green area), as well as increasing the profits of the other firms in the industry.
But a firm in a four-firm oligopoly who reduces quantity by the amount Q0 − Q1 increases the market price to P1 which is greater than MC. The increase in price increases the profits of the firm that cuts output (the green area), as well as increasing the profits of the other firms in the industry.