Unlike purely competitive firms,firms in monopolistic competition will operate with excess capacity even in long-run equilibrium.

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Firms in monopolistic competition differentiate their products to create a degree of market power, but this differentiation also creates a non-zero degree of substitutability between products. As a result, firms in monopolistic competition operate with excess capacity, meaning they produce less than the amount that would minimize their average total cost. This is true in both the short run and long run, as firms must continue to differentiate their products to maintain their market power, which results in a less than optimal use of their resources.

Unlike Purely Competitive Firms,firms in Monopolistic Competition Will Operate with Excess