Monopolistic competition under frictional entries.

This article develops a new theory of monopolistic competition by introducing the concept of frictional entries, which models a sticky, sluggish relationship between firms' expected profits and market entry. Unlike traditional models assuming perfectly elastic (frictionless) entry or entry with fixed costs, frictional entries better align with empirical evidence showing limited responsiveness of firm entry to profit changes. The theory demonstrates that frictional entries lead to a smaller number of active firms, higher individual consumption and markups, and greater aggregate production compared to standard models. Additionally, it predicts that prices and markups vary with income even under additive preferences, addressing empirical observations that classical models fail to capture. Finally, frictional entries amplify total factor productivity (TFP) shocks by activating the intensive margin of production, suggesting they constitute a novel source of macroeconomic volatility and imply that traditional models underestimate the role of firm entry in propagating productivity shocks.