Q:

How does monopolistic competition affect entry into an industry?

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Quick Answer

In an industry characterized by monopolistic competition, firms are free to enter the market because there are no barriers to entry, according to Economics Online. Firms are also free to exit the market.

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A barrier to entry is an obstacle that makes it difficult for a firm to enter an industry. Common barriers to entry include patents, government regulations and excessively high capital requirements. Industries with high barriers to entry include energy, pharmaceuticals and transportation.

In a monopolistically competitive environment, small entrepreneurs dominate and rely on differentiation to survive. Economics Online describes four types of differentiation: physical product, marketing, human capital and distribution. In physical product differentiation, firms use design, size, color, shape, performance and features to distinguish products from those of competitors. Marketing differentiation employs packaging and other promotional techniques. Human capital differentiation relies on disparate employee skills, training and other people-centered factors, while distribution employs different methods to get goods into the hands of consumers.

Because of the lack of barriers to entry, there are usually many firms in monopolistically competitive industries. As a result, they rely heavily on advertising, usually at the local level. According to Investopedia, these firms also have some degree of price control. They lack the freedom of monopolists to raise prices at will because consumers move to competitors, but they are freer than sellers of commodities in perfectly competitive markets.

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