<P> How many firms will an MC market structure support at market equilibrium? The answer depends on factors such as fixed costs, economies of scale and the degree of product differentiation . For example, the higher the fixed costs, the fewer firms the market will support . </P> <P> Like perfect competition, under monopolistic competition also, the firms can enter or exit freely . The firms will enter when the existing firms are making super-normal profits . With the entry of new firms, the supply would increase which would reduce the price and hence the existing firms will be left only with normal profits . Similarly, if the existing firms are sustaining losses, some of the marginal firms will exit . It will reduce the supply due to which price would rise and the existing firms will be left only with normal profit . </P> <P> Each MC firm independently sets the terms of exchange for its product . The firm gives no consideration to what effect its decision may have on competitors . The theory is that any action will have such a negligible effect on the overall market demand that an MC firm can act without fear of prompting heightened competition . In other words, each firm feels free to set prices as if it were a monopoly rather than an oligopoly . </P> <P> MC firms have some degree of market power . Market power means that the firm has control over the terms and conditions of exchange . An MC firm can raise its prices without losing all its customers . The firm can also lower prices without triggering a potentially ruinous price war with competitors . The source of an MC firm's market power is not barriers to entry since they are low . Rather, an MC firm has market power because it has relatively few competitors, those competitors do not engage in strategic decision making and the firms sells differentiated product . Market power also means that an MC firm faces a downward sloping demand curve . The demand curve is highly elastic although not "flat". </P>

Monopolistic competition is defined as a type of market structure where