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Monopolistic competition under frictional entries

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  • Vincent Boitier

Abstract

In this theoretical article, I develop a new theory of monopolistic competition models by introducing the notion of frictional entries. Frictional entries define a general sticky relationship between profits and entries, find large empirical support, and can encapsulate the standard free-entry condition and the entry condition with fixed costs as particular cases. I determine a steady-state equilibrium of such a new theory, and I find three results. First, I show that the new framework leads to a smaller mass of varieties, larger individual consumption/quantity, higher prices/markups, and larger aggregate consumption/production than traditional models. Second, I find that the new model predicts prices and markups that vary with income, even if preferences are additive. Last, I show that the presence of frictional entries can amplify TFP shocks and so can be considered as a new source of volatility for macroeconomic models.

Suggested Citation

  • Vincent Boitier, 2025. "Monopolistic competition under frictional entries," Oxford Economic Papers, Oxford University Press, vol. 77(1), pages 91-118.
  • Handle: RePEc:oup:oxecpp:v:77:y:2025:i:1:p:91-118.
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    File URL: http://hdl.handle.net/10.1093/oep/gpae018
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    More about this item

    Keywords

    frictional entries; monopolistic competition; additive preferences; amplification/mitigation of productivity shocks;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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