Under monopolistic competition, profits cannot persist because new firms will be attracted to the market.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms have some degree of market power due to product differentiation. However, since there are close substitutes available, it is unlikely that any one firm can sustain high profits in the long run. As profits increase, new firms are attracted to the market, which increases competition and reduces profit margins. Therefore, profits cannot persist in the long run in monopolistic competition.

Under Monopolistic Competition, Profits Cannot Persist Because New Firms Will