Why does the product-variety externality associated with monopolistic competition arise in monopolistically competitive markets

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In monopolistically competitive markets, firms try to differentiate their products to capture a larger market share and increase profits. This leads to the existence of a product-variety externality, where the entry of new firms leads to an increase in product variety, which benefits consumers. However, each new firm reduces the market share of existing firms, decreasing their profits. Thus, the product-variety externality arises due to firms' efforts to differentiate their products.

Why Does the Product-Variety Externality Associated with Monopolistic Competition Arise