Monopolistic competition produces zero long-run profit like perfect competition, yet firms price above marginal cost. Why does entry not eliminate the markup?

B. Entry erodes demand rather than price-setting power

Each firm keeps a downward-sloping demand curve because its product stays distinct, so entry shifts the curve inward until profit vanishes at a tangency left of minimum average cost. The result is the excess-capacity theorem, many firms each operating below efficient scale, which is the price of variety.