Entry Deterrence, Macroeconomic Equilibria and Pro-Competitive Policies

Abstract

This paper achieves a macroeconomic equilibrium which is microfounded on an oligopolistic entry deterrence game à la Dixit-Spence. This equilibrium has implications for pro-competitive policies which differ from those obtained by models based on a monopolistic competition framework: (i) positive effects on employment and real wage of a policy that increases the elasticity of demand persist in the long run; (ii) a reduction in the fixed entry cost has favorable effects on employment and real wage both in the short and in the long run; (iii) a mix of the two policies enhances their positive effects, asymptotically approaching competitive equilibrium.