Insufficient Entry in Monopolistic Competition

Paolo Bertoletti () and Federico Etro ()

No 543, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: We study entry in markets with monopolistic competition under quasi-linear preferences, with homogeneous and heterogeneous firms. For common demand systems with a price aggregator that is a demand shifter, we show that entry tends to be insufficient: namely that, given market pricing, the business stealing effect of entry cannot dominate the consumer surplus effect. We then identify preferences that deliver efficient production and selection of firms (including the isoelastic demand case), confirming the insufficient entry result also compared to first-best allocations, and discuss a specification (which includes the Logit case) that also delivers efficient entry. Finally, we introduce more general quasi-linear preferences (nesting those of Spence, Melitz-Ottaviano and other cases) that generate flexible demand systems depending on a price aggregator. In this framework, we show that competitive effects of entry on prices actually strengthen the case for insufficient entry, and discuss conditions for its emergence.

Keywords: Entry; Monopolistic competition; Business stealing; Heterogeneous (search for similar items in EconPapers)
JEL-codes: D11 D43 L11 (search for similar items in EconPapers)
Pages: 57
Date: 2024-07
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:543

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