Markups and the number of firms in a simple model of imperfect competition

Two counter-intuitive results regarding the number of firms emerge from the existing monopolistic competition literature. First, the number of firms is positively related to the extent of the monopoly power. Second, when the goods market is perfectly competitive, the number of firms is reduced to zero. This paper proposes a plausible way to escape from these two counter-intuitive deficiencies.

► We specify that entry cost is positively related to the extent of monopoly power. ► Markups and the number of firms turn out to be a negative relationship. ► The perfectly competitive market implies that the number of firms is indeterminate.