Final answer:
Economists understand that businesses strive to avoid competition to raise prices and increase profits, a principle dating back to the writings of Adam Smith. Over time, however, this tends to attract new competitors, leading to a decrease in profits and an eventual long-run equilibrium of zero economic profits in monopolistically competitive markets.
Step-by-step explanation:
The desire of businesses to avoid competing with each other is well-understood by economists, who have recognized that businesses aim to raise prices and earn higher profits by avoiding competition. Dating back to the works of Adam Smith, who in his seminal book "The Wealth of Nations" in 1776 remarked, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." This notion is supported by economic theories that suggest in the absence of competition, businesses can act more like a monopoly, setting higher prices to maximize profits.
However, this strategy of avoiding competition can be counteracted over time, as other firms may enter the market if they see the opportunity to earn positive economic profits. This increased competition can lead to a decrease in the original firm's profits, as the demand for their products may decrease in response. In the long-run equilibrium, economists predict that all firms in monopolistically competitive markets will earn zero economic profits.