When firms enter a monopolistically competitive market and the business-stealing externality is larger than the product variety externality, then

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When the business-stealing externality is larger than the product variety externality, firms entering the market will lead to more competition and lower prices, thereby reducing profits for all firms in the market. As a result, there may be too many firms in the market, leading to inefficiencies such as excess capacity and higher prices. Therefore, market efficiency could be increased if some firms exit the market.

When Firms Enter a Monopolistically Competitive Market and the Business-Stealing