How does oligopolistic firms' interdependence shape the firms' behavior and what problems does it raise for public policy?

Oligopolistic firms are interrelated in terms of pricing and output decisions, based on the model in which they operate. There is a high level of rivalry within existing large firms. If one firm lowers the price, the others will follow suit, but if one firm raises the price, the others will keep its price unchanged in order to increase market demand. As a result, firms decide on their price/output decisions on the basis of price/output decisions taken by other firms, and their behavior is defined accordingly. In extreme cases, firms can maximize their interdependence by establishing a cartel that is a collusive form of oligopoly. The cartel or price/output sharing agreement may be implicit, in which case the public policy to maximize social welfare by requiring firms to charge a price equal to their marginal cost will fail.