Explain the following as applied to oligopoly: cartel, gentlemen's agreements price leadership.

Oligopoly is a market structure in which a small number of firms dominate the industry. These firms can produce homogeneous or differentiated products. They recognize their mutual interdependence and the fact that what one firm does will impact the others. This leads to strategic behavior, which can take several forms, one of which is forming cartels or gentleman's agreement, or assuming price leadership.

A cartel is an association of manufacturers or suppliers within the same industry who, for the purpose of reducing competition and controlling prices, agree to limit production and control sales. They artificially restrict outputs, set rigid price levels, or share the market among themselves. Cartels can have several detrimental effects on the marketplace, including higher prices and reduced quality. This is why in many countries, cartels are considered illegal.

A gentleman's agreement is an informal pact between competitors, which they mutually decide not to take certain actions that will hurt each other's business. Unlike a cartel which is formal and has legally binding agreements, a gentleman's agreement is done on the basis of trust between the firms. They may agree to avoid aggressive price competition, not to enter each other's territories or agree on restricting the quantities they will produce. Since the agreement is informal and often secretive, it is much harder to detect and regulate for competition authorities.

Price leadership is a scenario where one dominant firm in the oligopoly becomes the 'price leader', and the other firms follow this leader in setting their own prices. The price leader is usually the largest firm in the market, which has the lowest cost and greatest market share. It sets the price based on its analysis of market demand and its own cost and the follower firms simply match the price set by the leader. This strategy, much like a cartel or gentleman’s agreement, is often used to reduce uncertainty within the market and maintain higher profits for all firms involved. If any firm tries to increase its profit by decreasing price, other firms follow, leading to an overall decrease in the market price. This 'price war' is essentially a dangerous game that can end in decreased profits for everyone involved. To avoid such a scenario, the firms might decide to follow the price leader.