Question

The market for household appliances in Richland is monopolistically competitive. Some firms in this market are incurring losses. However, they have not stopped production. What is the reason behind such behavior?

Answer 1

Monopolistic competition exists in industries that have many firms offering similar products or services. In monopolistic competition, those similar products are not perfect substitutes for one another. Barriers in entry and exit of these industries are low and decisions made by one firm do not directly affect its competitors. In the short term, a monopolistically competitive industry can incur losses nut only if those loses are higher than the fixed costs the organization will stop operations.