Existence, Uniqueness, and Stability of Equilibrium in an Overlapping Generation Model with Monopolistic Competition and Free Entry and Exit of Firms

In this paper, we have analyzed existence, uniqueness and stability of steady-state equilibrium in an overlapping generations model with monopolistic competition and free entry and exit of firms. We establish a strenghtened Inada condition that is sufficient to exclude global contraction for any given set of well-behaved preferences. We also establish sufficient conditions for a non-trivial steady-state equilibrium to exist, and also sufficient conditions for its uniqueness and global stability. We show that the size of mark-up over marginal cost and the particular mix of fixed costs play a crucial role in these conditions and consequently on the dynamic behavior of the economy.