Monopolistic competition under frictional entries: Extended

In this theoretical article, I develop a general theory of firm entry by introducing the notion of frictional entries. Frictional entries define a general sticky relationship between profits and entries and find large empirical support, unlike frictionless entries. Frictional entries can also be microfounded by different stories, including random entry costs, congestion effect in entries, random utility models, etc. I determine a steady-state equilibrium of this new framework (which can be represented by a Master Equation), compare it to frictionless entries, and find the following results. First, I show that a steady-state equilibrium with frictional entries is well-posed, as it exists, is unique and stable. I also show that convergent trajectories exist under mild conditions. Second, I find that the new framework leads to a smaller mass of varieties, larger individual consumption/quantity, higher prices/markups, and larger aggregate consumption/production than models with frictionless entries. Third, I show that frictional entries can encompass (among others) the standard zero-profit condition, the entry condition with fixed entry costs and the entry condition in occupational choice models as limiting cases. Fourth, I determine the conditions under which a steady-state equilibrium is optimal using a potential approach. Last, I prove that frictional entries can explain stylized facts about markups, the intensive and extensive margins that standard models with frictionless entries cannot explain. Consequently, I show that frictional entries can amplify or attenuate exogenous shocks depending on preferences. Equivalently, they can be considered as a new source of volatility/dampening for theoretical models.