Explain why firms in an oligopolistic industry have an incentive to collude.?

Question

but also an incentive to cheat on any collusive agreement?

Answer 1

Money.

If everyone agrees to restrict production, limiting supply, demand pushes prices up, increasing the profit for each unit sold. If everyone else restricts but one cheats, the cheater gets the advantages of higher prices and large quantities.

Look at the history of the Opec Oil cartel,

http://library.thinkquest.org/26026/Econ...

http://www.beginnermoneyinvesting.com/ht...

http://www.wtrg.com/opecshare.html

the De Beers diamond cartel,

http://mises.org/econsense/ch91.asp

the cocoa cartel, etc.

http://query.nytimes.com/gst/fullpage.ht...

http://www-wds.worldbank.org/servlet/mai...