Question

Monopolistic competition characterizes an industry in which many firms offer products or services that are similar, but not perfect substitutes. Barriers to entry and exit are low, and the decisions of any one firm do not directly affect those of its competitors. So why does a firm in monopolistic competition make zero economic profit rather than an economic profit in the long run?

Answer 1

Even though monopolistic competition is characterized by product differentiation one has to understand that there is free movement in the industry where anyone can enter and exit the industry and the differentiated product is thoroughly studied by the players which is fetching maximum amount of market share and profits and there is always a benefit for players to come up with similar products with less differentiation in the long run so that people get motivated to purchase from the stores where the prices less and this cannot be stopped because in monopolistic competition there is less protection from the differentiation where anyone can copy your product and that is the reason why ultimately the price decreases for the product and the profit level comes down to normal profit and that is why it is not possible for a monopolistic competition to earn economic profits in the long run.