Introduction
Monopolistic competition often eliminates economic
profits, thus leading to losses in the short run after entries have
ventured into a particular market. However, the freedom to exit these
markets could influence high prices and eliminate economic losses. Such
industries in monopolistic competition could include; hairdressing,
fashion enterprises, and restaurants. Usually, profits can be maximized
when the marginal revenue and marginal costs are equal. Therefore, the
equilibrium output is determined by the point where the marginal revenue
and costs are equal (Krylovskiy, 2020). While companies in monopolistic
competition could face long-term economic losses, they assess their
output and price of products in the short run the same way companies in
a monopoly do. However, these companies could produce at a level where
the marginal revenues and costs are equal in the long run. However, the
demand curve shifts to the left because of new entries into monopolistic
markets or industries. The demand curve shift is usually caused by
reduced demand concerning a company’s products due to increased
competition. Therefore, when the magnitude of the entry of new players
is high, existing monopolistic companies could experience reduced
economic profits; hence companies can hardly sell their products at
above-average costs.