We introduce endogenous strategic interactions under competition in quantities and in prices together with endogenous entry in a dynamic stochastic general equilibrium model with ?exible prices. The endogenous mark ups depend on the form of competition and on the degree of substitutability between goods, and they vary countercylically while pro?ts are procyclical. Positive temporary shocks to productivity and government spending attract entry. Entry strengthens competition between ?rms, which temporary reduces mark ups and prices: this creates an intertemporal substitution e¤ect which provides an extra boost to consumption. The model outperforms the standard RBC framework in matching impulse response functions and second moments for US data.
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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number
126.
Find related papers by JEL classification: L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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