A new entrant isn't guaranteed to now price at $475. They'll see the incumbent being successful at $500. Now they price at $499 rather than trigger a destructive price war. Companies collude on this quite frequently. When everyone keeps their prices high, all get to enjoy the big margins.

Outside of that, ok so you have a warehouse full of widgets you need to move fast. So you undercut, and sell out. If demand is still bigger than your supply, you're now out of capacity, customers are going back to buying for $500 from your competitor. That means you've mispriced your limited inventory, so now you raise your prices up to closer to $500 because it helps you control your capacity, and also you know the market can clearly bear it.

Anyway, those are obviously overly simplified scenarios prices rarely fall down dramatically because of tacit collusion. Its asymmetric price transmission ("Prices go up like rockets, but fall like feathers")