Final answer:
The monopolistic competition model assumes firms will engage in nonprice competition and will not achieve allocative or productive efficiency in the long run. Instead, firms can only attain normal profits due to new entrants, and consumers enjoy a variety of products.
Step-by-step explanation:
The monopolistic competition model assumes that firms will engage in nonprice competition. This can include product differentiation, marketing, and other strategies to attract customers besides competing on price.
In the long run, firms in a monopolistic competitive market can only achieve normal profits due to the entry of new competitors, effectively driving the economic profits to zero.
Unlike in a perfectly competitive market, firms in monopolistic competition do not achieve allocative efficiency, where price equals marginal cost, nor do they achieve productive efficiency, where firms produce at the minimum of average cost.
In monopolistic competition, firms tend to operate with excess capacity. The trade-off in this market structure is that consumers benefit from a wide variety of products.