Insufficient Entry in Monopolistic Competition

We study entry in markets with monopolistic competition under quasi-linear preferences, with homogeneous and heterogeneous firms. For common demand systems with a price aggregator which works through a demand shifter, entry tends to be insufficient: given market pricing, the business stealing effect of entry cannot dominate the consumer surplus effect. We identify preferences that deliver efficient production and firm selection (including the isoelastic demand case), confirming the insufficient entry result also compared to first-best allocations, and discuss a specification (including the Logit case) that delivers efficient entry. Under more general preferences competitive effects of entry strengthen the case for insufficient entry.