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

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, firms have some market power to set prices above marginal cost, leading to an inefficiently low output level. If the loss from a business-stealing externality (where competing firms poach each other's customers) is higher than the gain from a product-variety externality (where consumers benefit from having a greater variety of products to choose from), then there are likely to be too many firms in the market, exacerbating the market power problem and leading to even greater inefficiency. Therefore, choice B is the best answer.

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