The price index effect, entry, and endogenous markups in a macroeconomic model of monopolistic competition

Models of imperfect competition contain the possibility of multiple equilib ria when the markup of price over marginal cost is negatively dependent on acticity. The model most often used in applied work, the Dixit and Stiglitz (1997) model, is usually thought not to be able to produce such an effect. However, this paper presents a macroeconomic model where free market entry of firms is considered in the generalized version of that model, originall y due to Yang and Heijdra (1993) and d'Aspremont et al. (1996). A price ind ex effect makes the markup depend on the number of firms which in turn depe nds on activity, so there may be multiple equilibria in this economy.