We analyze monopolistic competition when consumers have an indirect utility that is additively separable. This leads to markups depending on income (both in the short and long run) but not on the market size, which generates pricing to market, incomplete pass-through and pure gains from variety for countries that open up to trade. Firms' heterogeneity a la Melitz implies a Darwinian e ect of consumers' spending on business creation and a Linderian e ect on (endogenous) quality provision. We discuss extensions with an outside good and heterogenous agents, and o er simple and tractable speci cations (linear or log-linear) of the demand functions. This paper proposes an alternative model of monopolistic competition in the tradition of the studies of large markets (Chamberlin, 1933), where rms choose prices independently and entry is free. The model is based on a class of non-homothetic preferences, unexplored in the analysis of monopolistic competition, which satisfy indirect additivity and delivers convenient speci cations for applied research, especially in trade and macroeconomics.

I characterize the incentives to undertake strategic investments in markets with Nash competition and endogenous entry. Contrary to the case with an exogenous number of firms, when the investment increases marginal profitability, only a "top dog" strategy is optimal. For instance, under both quantity and price competition, a market leader overinvests in cost reductions and overproduces complement products. The purpose of the strategic investment is to allow the firm to be more aggressive in the market and to reduce its price below those of other firms. Contrary to the post-Chicago approach, this shows that aggressive pricing strategies are not necessarily associated with exclusionary purposes.

A new rationale for the persistence of monopolies is based on a precommitment of the incumbent monopolist to invest in R&D. In a patent race, as long as entry is free, the Arrow effect disappears: the incumbent has more incentives to invest than any outsider. Paradoxically, a market with some persistence of monopoly is competitive, while one with continuous leapfrogging must hide some barriers to entry. When the size of innovations is endogenous, leaders invest in more radical innovations. If there is a sequence of innovations, cycling investment emerges. Finally, I apply the idea to a general equilibrium model of Schumpeterian growth with persistence of monopoly.

I characterise endogenous market structures where leaders have a first‐mover advantage and entry is endogenous. Leaders are always more aggressive than the followers, independently from strategic substitutability or complementarity. Under quantity competition, leaders produce more than any follower and I determine the conditions for entry‐deterrence (high substitutability and non‐increasing marginal costs). Under price competition, leaders set lower prices than the followers (the opposite than with an exogenous number of firms). In contests, leaders invest more than each follower. In all these cases a leadership improves the allocation of resources compared to the Nash equilibrium with endogenous entry.

We model an international union as a group of countries deciding together on the provision of public goods or policies that generate spillovers across members. The trade-off between benefits of coordination and loss of independent policymaking endogenously determines size, composition and scope of the union. Policy uniformity reduces the union's size, may block enlargement processes and induce excessive centralization. We study flexible rules with non-uniform policies that reduce these inefficiencies focusing on arrangements relevant in the context of existing unions or federal states, like enhanced cooperation, subsidiarity, federal mandates and earmarked grants.

We characterize endogenous market structures under Bertrand and Cournot competition in a DSGE model. Short run markups vary countercyclically because of the impact of entry on competition. Long run markups are decreasing in the discount factor and in productivity, and increasing in the exit rate and in the entry costs. Dynamic ine¢ ciency can emerge due to excessive entry under Cournot competition. Positive temporary shocks attract entry, which strengthens competition so as to temporary reduce the markups and increase real wages: this competition e¤ect creates an intertemporal substitution e¤ect which boosts consumption and employment. Endogenous market structures improve the ability of a ‡exible prices model in matching impulse response functions and second moments for US data.JEL classi…cation: L11, E32.

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for useful comments. Alesina gratefully acknowledges financial support from the NSF through the NBER. Etro is grateful to Robert Barro for encouragement and support and acknowledges financial support from Fondazione Luigi Einaudi. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research or the affiliating institutions.