Monopolistic competition under frictional entries

Vincent Boitier

Oxford Economic Papers, 2025, vol. 77, issue 1, 91-118

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.

Keywords: frictional entries; monopolistic competition; additive preferences; amplification/mitigation of productivity shocks (search for similar items in EconPapers)
JEL-codes: D42 E3 L11 L13 (search for similar items in EconPapers)
Date: 2025
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