In a monopolistically competitive market, if the negative impact of firms taking customers from each other outweighs the positive effect of increased product variety, what is the likely outcome?

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The market has an excessive number of firms, and overall efficiency would improve if some firms left the market.The current number of firms is ideal, resulting in an efficient market structure.There are too few firms present, and efficiency could be enhanced by allowing more companies to enter.Efficiency can only be achieved if the government intervenes and manages the market as a natural monopoly.

Explanation

When the business-stealing externality dominates the product-variety externality, it means firms harm each other's profits more than they contribute to consumer choice. This leads to an oversupply of firms, causing inefficiency. Reducing the number of firms would enhance market efficiency.