- A way in which Monopolistic Competitive firms may be socially inefficient is that the number of firms may not be ideal i.e. too many or too few due to free entry.
- Whenever a new firm considers entering the market with a new product, it considers only the profit it would make. Yet its entry could have 2 external effects:
• The business-stealing externality, because other firms lose customers and profits from the entry of a new competitor, entry of a new firm imposes a negative externality on existing firms.
- Depending on which externality is larger a monopolistic
- We can conclude that monopolistically competitive markets
competitive markets.