Final answer:
Firms dependent on their market aggressively defend it against competitors, as seen in monopolistic competition. Positive profits draw new entrants, leading to competitive defenses to maintain market share and economic viability. In the long run, competition tends to level the playing field, resulting in no economic profits.
Step-by-step explanation:
The more dependent a firm is on its market, the more aggressively it will defend it against another competitor because a firm's market represents its customer base, revenue stream, and ultimately, its survival. In the context of monopolistic competition, firms are characteristically unique and competitive.
For example, if a monopolistic competitor earns positive economic profits, it will attract other firms. A gas station in a prime location may face new competitors, while a restaurant with a signature barbecue sauce might find others attempting to emulate or surpass its appeal.
Similarly, a laundry detergent brand known for quality will be on its toes to preserve its market share as rivals might endorse their products' comparative excellence.
These scenarios illustrate that when a business is successful, the threat of new entrants looms, which can lead to a decrease in demand, lower profits, and an eventual long-run equilibrium where firms earn zero economic profits.
Being proactive and defending market share is critical for these firms. The competitive pressure from firms offering better or cheaper products can diminish profits and may even lead to the exit of the original firm from the market. Employees could lose income or jobs as a result.
Thus, firms must constantly innovate and enhance their offerings to maintain their standing against the competition.