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guys, I have this doubt that if the fast food industry such as KFC, and Maccas are examples of monopolistic competition how are they still making a profit? Because as per the model in long run the monopoly competition won't make profit as more competition enter the industry ?
First of all KFC and similar large fast food chain are not a good example of monopolistic firm, at least not in most countries they are more closely related to oligopoly. The reason for that is that by assumption there has to be too many monopolistic firms for them to have any sort of meaningful (game-theoretical) strategic interaction. The number of large fast food chains is not that large and they seem to strategically interact a lot.
Second, the model shows that monopolistic firms do not earn economic profit not that they do not earn profits. Even firm with accounting profit of billions could be earning zero economic profit. The profit that firms report in their quarterly reports and the profit numbers you hear in the news are not the actual economic profit. Those are all accounting profits.
For example, if a monopolistic firm supplies its own capital (machines, building etc) and the company needs 1tn dollars of capital (let's say its a KFC type fast food) and opportunity cost of capital is 5% (let's suppose that's what the owners of capital can earn if they invest the money into something else) then that company can report even \$50bn accounting profit (the number you will find in quarterly reports, news etc) yet that company would still have exactly 0 economic profit. To have positive economic profit the company in the example has to earn more than \$50bn. If the company would earn less than \$50bn accounting profit the company would actually have economic loss.
More than fast food chains, I think Walmart, Amazon, and on a slightly more niche basis, Home Depot are better examples of Monopolistic entities. Walmart, in the US, anyway, dominates brick and mortar retail sales, to the point that various sections of the store had entire stores dedicated to the sales of items in the past (i.e. music and movies) and those stores no longer exist in markets where Walmart is established.
Amazon is weird in that retail merchandise sales make up very little of their income, but take up a large part of their organizational structure. Most of the actual income at Amazon comes from the sales of server space, but still they are also ubiquitous and omnipresent in the online retail space with negligible competition.
In the classic economic model, monopolies manipulate price to maximize short term accounting profit, while foregoing economic profit, because accounting profit is much more tangible, and we can see this with the disaster that was the California Power Deregulation and Enron.
And, as can be expected in our economy, once things got out of control, some regulatory government agency investigates and files antitrust lawsuits, which break up the monopolies, or in the case of power, which is a natural Monopoly, reinstates the previous regulations and regulatory agencies to control the industry.
With this in mind, Walmart and Amazon have decided to act as if they are facing competition by keeping prices at a level consistent with heavy competition, and have decided to use their Monopolistic power to lower their cost of goods sold by manipulating the price of labor and goods sold.
This is much less noticable to the public at large, or to politicians and regulatory agencies and has allowed these companies to continue operating as obvious monopolies, unabated.
I don't know how this affects economic profit, but it's what I would concentrate on, as opposed to price manipulation, when studying the topic.
