Differentiated oligopoly exists where a small number of firms are:

A) producing goods that differ in terms of quality and design.
B) setting price and output collusively.
C) setting price and output independently.
D) producing virtually identical products.

In differentiated oligopoly, firms produce goods that differ in terms of quality and design. This allows them to compete on characteristics other than price, and gives them some market power. This is in contrast to a homogeneous oligopoly, where firms produce virtually identical products and compete mainly on price. Collusive behavior (B) would be indicative of a cartel, which would be illegal in many countries. Setting price and output independently (C) would result in a competitive market, not an oligopoly.