Question

A monopolistically competitive firm sells a differentiated product but there are many firms and there is competition involved..How do such firms still manage to promote their product? Do they make Economic profit in the long run?

Answer 1

Answer - In the monopolistic competition , in the short run , the firms have heavy competition but they sell the differentiated products. The products are the close substitutes but not the perfect substitutes. Also , the monopolistic firms take the help of advertising in order to promote the product. The firm faces the downward sloping demand curve in short run and can lower its price to sell more. In this way the firms face the competition.

In the short run , the earning of the positive economic profits by the monopolistic firms attracts the entry of new firm in the long run. Hence the demand of existing firm reduces and the price go down. This leads to the earning of only normal profits in long run