384PART FIVEFIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY◆The product-variety externality:Because consumers get some consumer surplusfrom the introduction of a new product, entry of a new firm conveys apositive externality on consumers.◆The business-stealing externality:Because other firms lose customers andprofits from the entry of a new competitor, entry of a new firm imposes anegative externality on existing firms.Thus, in a monopolistically competitive market, there are both positive and nega-tive externalities associated with the entry of new firms. Depending on which ex-ternality is larger, a monopolistically competitive market could have either too fewor too many products.Both of these externalities are closely related to the conditions for monopolis-tic competition. The product-variety externality arises because a new firm wouldoffer a product different from those of the existing firms. The business-stealing ex-
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