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We know that the price-setting mechanics and individual firm's behaviour in a competitive market are different with those of monopoly powers'.

However, the demand curves of both competitive market(as a whole)and monopoly market slope down.

So here's the question: can we view the competitive market as a whole as some kind of monopoly power?

PS: What I'm talking about is purely theoretical. Hence pure theory is ok for my question.

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Intuitively, I would say no. The main power that a monopoly has is that the firm can change prices at will, whereas a competitive firm has no power over price.

The competitive market demand curve slopes downward simply because of the law of demand. The typical procedure is to take the price determined by the aggregated demand curve as given and set the individual firm's demand curve equal to that. This seems peculiar (to assume to know the market demand before you know the firm's demand), but given the assumptions of perfect competition (particularly perfect knowledge), this does make some sense. If every firm has perfect knowledge of demand for their good, then they inherently know the market demand curve. The reason why this is important is because that is how you derive the price taking behavior of competitive firms.

Now that we have determined why price taking behavior exists, we can discuss whether competitive markets (as a whole) can behave like monopolies. The answer to this is that it would be nearly impossible for an aggregate competitive market to behave like a cartel (monopoly). The reason for this is because of the perfectly elastic nature of their demand. Suppose, somehow every firm agreed to increase their price to the exact same amount at the exact same time. Suppose further one firm had the ability to produce enough of the good to meet demand at a certain price. This firm (or any firms like it) would have a huge incentive to lower their price because by lowering their price (even by an infinitesimally small amount), they would instantly capture all of the demand for the good. If just one firm decides to cheat, then the whole market would end up right back at where they started at the original market price. For this reason, it is nearly impossible for an aggregated perfectly competitive market to act like a cartel.

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Yes, to the extent that a component of the competitive market is unexpandable. This could be scare minerals, patents, or even just the economies of scale. Given that such scarcity exists in virtually all production, elements of a monopoly market will exist in any so-called "competitive" market.

Why is this so? Because where production is limited by capacity and capacity is scarce, then price wars can not exist. Acme sells widgets for 50 dollars. As does XYZ. Acme wants more business...so they lower their price to 30 dollars. But then they have more business than they can service. They then have a shortage...and people end up buying XYZ widgets even if they are more expensive, so Acme raises their price for rationing and we're back to where we started.

If Acme raises their price to 70 dollars, XYZ can't stay the same at 50 dollar, else they will sell out. So in this strange way, many "competitive" markets (like say oil) behave as one monopolistic entity.

Say Acme and XYZ merge...their behavior will be the same. They will not lower prices because of fixed capacity but can and will raise prices to monopolistic levels.

To the extent that factors of production can not be duplicated this will be a factor (we can't "make more oil", we can't ignore patents, and economies of scale can not be duplicated). On the last point, what I'm saying if production cost per unit have an inverse relationship with sales volume, than bigger companies will have an advantage that smaller do not. Or put another way, we can't have 50 mass makers of computer processors with the same scale benefits AMD and Intel enjoy now.

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    $\begingroup$ If we are talking about a competitive market (in theory), each firm has perfectly elastic demand, there are a very large number of firms and there are no barriers to entry. In this context, if XYZ increases it's price, they sell nothing. If XYZ continues to operate at a higher price than the market price, they will shut down, and a new firm will take their place. You seem to be confusing perfect competition with monopolistic competition (where there are some barriers to entry). $\endgroup$ – DornerA Nov 26 '15 at 16:42
  • $\begingroup$ There is no such thing as a truly competitive market. There are always limited factors of production that guarantee that not all play by the same rules. $\endgroup$ – user2662680 Nov 26 '15 at 18:36
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Simply no. A perfect monopoly's profit maximizing output will always be smaller than the competitive market as a whole would have provided. And the price would be higher. The marginal revenue curve of the monopoly is not the demand curve while in case of competitive market the marginal revenue curve is the demand curve itself. Summing up the optimum individual supplies horizontally we get the market supply. Also, all the firms in a competitive market are in a 'prisoner's dilemma'. There exists a price rigidity. Even if a firm's cost curves shift up (increase) it cannot increase the price readily as it will face a devastatingly elastic demand curve as soon as it does so and it will be thrown out of market. In case all of them collude to restrict output and increase price, there will be an unsatisfied demand in the market which will lure someone or the other to defect and satisfy that demand at a lower price and earn huge profits and the collusion will fail (there are real life examples of such incidents such as OPEC which enjoyed exorbitant oil prices-the oil shock in 1970s but its power now is highly reduced). So in the long run all firms in a competitive market are bound to earn zero economic profit and hence they cannot behave as a monopoly together.

But there is a catch here. If the monopoly has access to some crucial technology which it could possess only because of economies of scale then the monopoly can actually provide a lower cost than the perfect competition. This is one of the argued benefits of a monopoly. For example it is said that INTEL enjoyed monopoly and hence supranormal profits in the initial years because of which it could invest heavily in research and development which it could not have been able to do otherwise. This actually helped the industry to grow and eventually cheaper technology was made available. However these arguments are open to debate.

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