Why might price collusion occur in oligopolistic industries? Assess the economic desirability of collusive pricing. What are the market obstacles to collusion?Speculate as to why price leadership is legal in the United States, whereas price fixing is not.

Price collusion might occur in oligopolistic industries in order to maximize profits and for firms to keep abreast with competition. For example, in the tobacco industry the competing firms might collude with each other to set quantities and prices instead of engaging in regular competition or price wars. Trust is an essential component of price collusion obviously.

Some obstacles that could arise in price collusion is that while each firm in the oligopoly is selling more or less an identical product, they do not have the same supply and demand. Even if quantities and prices are regulated to be 100% exact within the oligopoly, market laws of supply and demand will have differing effects on each firm. Again, take the tobacco example. Demand, for instance, of Marlboro's products is different for Camel. Therefore, they cannot completely collude. Trust is another obstacle. All firms must completely collude and trust one another for the price collusion to work. There is always an incentive to cheat.

Price leadership is legal in the U.S, while price fixing is not because price leadership simply means that the leader in the industry sets the price. All firms would then follow the leading firm or compete. Price fixing is not allowed because it requires more than one firm to collude, and creates large barriers to entry for other firms.