Question

Suppose that in the short-run market demand in a monopolistically competitive industry that is characterized by firms with identical cost functions rises. How does this short-run increase in demand affect the monopoly power of any individual firm in the long-run?

Answer 1

We are given that in the short run demand is increased. For all firms, now with an increased demand and unchanged cost, this brings in profits. The short run has no entry and exit and therefore, these profits are maintained. In the long run, however, as new firms enter the industry attracted by profits, the demand curve faced by each firm falls because consumers now switch to other (new) firms as well. This shift in demand continues till the market reaches the same long run equilibrium level of output and price where economic profits are zero

Hence, the short-run increase in demand does not affect the monopoly power of any individual firm in the long-run because in the long run it experiences zero economic profits.