List the three different ways in which oligopoly firms may behave.

Oligopoly firms may behave in the following three ways:

1) Cartel − In order to avoid undue competition, oligopolistic firms may engage in formal agreements or contracts. This will not only allow them to maximise their total profits together, but also capture a significant market portion.

2) Informal understanding − Each firm may decide on its own, how much units of output is to be produced for maximising its individual profit, assuming that other firms would not change their strategies and decisions regarding the units of output to be produced.

3) Advertisement and differentiated product − It may happen that the firms realise that price competition will leave them nowhere and consequently they emphasise more on advertising their products. It will enable them to capture the minds of consumers and indirectly increase their market portion.

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