Sunk Costs, Windows of Profit Opportunities, and the Dynamics of Entry

Abstract

This paper adds two elements to a standard model of monopolistic competition: First, the number of potential entrants is limited in each period and increases only over time. Second, the potential entrants differ with respect to the consumers' valuation of the variant they could offer. It is shown that the resulting simple model exhibits a rich dynamic structure covering cases like the product life cycle, a path dependent equilibrium and the traditional textbook case of entry. The welfare analysis confirms the view that you can't have too much entry.

JEL Classification: L10