When the loss from a business-stealing externality exceeds the gain from a product-variety externality,

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In a monopolistically competitive market, firms differentiate their products to capture larger market shares, which creates a product-variety externality. However, this leads to inefficiencies due to duplication of resources and higher prices. On the other hand, business-stealing externality occurs when firms gain market share at the expense of existing firms, leading to loss of potential profits and a reduction in efficiency. If the loss from business-stealing externality exceeds the gain from the product-variety externality, there are likely to be too many firms in the market, and some firms need to exit to restore efficiency.

When the Loss from a Business-Stealing Externality Exceeds the Gain