A monopolistically competitive industry features many sellers, free entry, and differentiated products.

Since products are differentiated, each firm retains a downward-sloped demand curve and P remains above MC. Free entry, however, means that in the long run price is driven down until P = AC and each firm earns a zero economic profit. Monopolistically competitive industries have lots of variety but products are not produced at minimum average cost.

Advertising can be informative as in advertising about price, quality, and availability. Advertising can also increase perceptions of product differentiation, which allows firms to increase prices. Put differently, advertising can add to consumers’ understanding and enjoyment of a product by changing what the product means to them.