When the loss from a business-stealing externality exceeds the gain from a product-variety externality,what do we expect will happen

Question

Quizplus · Accepted Answer

When the loss from a business-stealing externality exceeds the gain from a product-variety externality, there are likely to be too many firms in a monopolistically competitive market. This is because the negative externality from each firm's entry into the market outweighs the positive externality from the increased variety of products available to consumers. As a result, the market is likely to be inefficient, with too many firms producing too little output at too high a price.

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