Question

What kind of profits does a monopolistic competitor make in the long run? Why? Cite your sources.

Answer 1

A monopolistically competitive market's long-run characteristics are almost identical to a perfectly competitive market. Two differences between the two are that monopoly competition produces heterogeneous products and that monopoly competition involves a great deal of non-price competition, based on subtle differentiation between products. Nevertheless, a firm making profits in the short run will only break even in the long run, as demand will decrease and total average cost will increase. This means that a monopolistically competitive firm will generate zero economic profit in the long run.

This illustrates how much influence the firm has over the market; it can raise its prices without losing all its customers because of brand loyalty. In contrast to perfect competition, which has a perfectly elastic demand schedule, this means that the demand curve of an individual firm is downward sloping.

Like a monopoly, a monopoly competitive company will maximize its profits by producing goods to the point where its marginal revenues are equal to its marginal costs. In the long run, a company's demand curve in a competitive monopoly market will shift so that it is tangent to the average overall cost curve of the company. This will make economic profit impossible for the firm; it will only be able to break even.

Source- Book on The monopolistic competition revolution in retrospect - Steven Brakman