Question

Explain 'freedom of entry and exit of firms in industry' feature of monopolistic competition.

Answer 1

Under monopolistically competitive market, firms are free to enter the industry or leave the industry. However, new firms have no absolute freedom of entry in the industry. Products of some firms may be legally patented. New firms cannot produce those products. Still now firms may join any industry if they expect to earn profit. A loss-making firm may, however, leave the industry easily. There are no explicit barriers to entry and exit in a monopolistic competition setup of the market.