Under Monopolistic Competition, firms are free to enter into or exit from the industry at any time they wish. Free entry and exit of firms means that there are no barriers before the firm for entering into the industry and leaving the industry. New firms can enter when they find that the existing firms are earning abnormal profits. With their entry, output of the industry increases, which leads to fall in the price of the product. This continues till each firm is earning only normal profit. The existing firm leave when they face losses. As they leave, output of the industry goes down, raises the price of the product till the losses are wiped out. It ensures that there are neither abnormal profits nor any abnormal losses to a firm in the long run.
