Monopolistic competition under frictional entries

Abstract

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.