Isn't a monopolistic competitor most likely to earn zero economic profits in the long run, due mainly to the assumption of easy entry and exit?
I would argue no, a monopolistic competitor is likely to earn economic profits. Almost by definition, a monopolistic competitor exhibits some monopoly power. The power arises from brand loyality, some general or sepecific product differentiation, or some institutional reason -- that cannot be exactly copied by a new firm entering the industry.
That said, you could easily argue that the marginal firm (the last to enter and/or first to leave an industry) would most likely earn zero economic profits, even if it is monopolistic competitor.
This is due to the assumption of easy entry and exit, which implies that the market is competitive and that firms will earn only normal profits in the long run.
In the long run, a monopolistic competitor is more likely to earn zero economic profits due to the assumption of easy entry and exit. While there may be some firms within a monopolistically competitive industry that have brand loyalty or product differentiation that gives them some monopoly power, these advantages are not likely to be sustained in the long run.
In a monopolistically competitive market, firms compete based on product differentiation and branding. However, because there are low barriers to entry, new firms can easily enter the market and imitate or introduce their own differentiated products. This increased competition leads to a decrease in market share and reduces the ability of firms to charge higher prices and earn economic profits.
Over time, as more firms enter the market, the industry becomes more competitive, and the demand for individual firms' products becomes more elastic. This means that firms have less pricing power and are unable to maintain pricing above their average total cost. As a result, economic profits tend to be eroded, and firms may only earn normal profits, which are just enough to cover their opportunity costs.
Therefore, while a monopolistic competitor may initially earn economic profits due to their differentiated products, the forces of entry and competition will eventually erode these profits and bring them closer to zero in the long run. The marginal firm, which is the last to enter or first to leave the industry, is most likely to earn zero economic profits even if it is a monopolistic competitor.
To understand why a monopolistic competitor is most likely to earn economic profits in the long run, it's important to consider the assumptions and characteristics of this market structure.
In a monopolistic competition, there are many firms operating in the market, but each firm sells a slightly differentiated product. This product differentiation allows each firm to have some degree of market power, as they may have loyal customers who prefer their specific brand or their unique features. This differentiation can result from factors such as branding, advertising, location, or product quality.
The assumption of easy entry and exit means that new firms can enter the market relatively easily and existing firms can leave if they are not making profits. However, the key point is that while it is easy to enter the market, it is not easy to replicate the exact differentiation that existing firms have already established.
When a monopolistic competitor earns economic profits in the short run, it attracts the attention of potential entrants who see the prospect of making profits in that market. However, due to the existing firm's monopoly power derived from its differentiation, newcomers cannot simply replicate this advantage overnight.
So, in the long run, while new firms can enter the market, it takes time and effort for them to establish a unique selling proposition or build brand loyalty. During this period, existing firms can continue to earn economic profits, resulting in above-normal returns.
It is important to note that in the long run, the entry of new firms will increase competition, leading to a decrease in demand for each individual firm and potentially reducing their profits. However, as long as the firm's differentiated product retains some degree of monopoly power, it is likely to continue earning economic profits, albeit potentially lower than the initial period.
In summary, the assumption of easy entry and exit in monopolistic competition does not necessarily imply zero economic profits in the long run. The ability of existing firms to maintain some level of differentiation and market power allows them to continue earning economic profits even when new firms enter the market.