Entry and Welfare in General Equilibrium With Heterogeneous Firms and Endogenous Markups

We analyze market entry efficiency in single‐ and two‐sector closed‐economy Melitz–Ottaviano (MO) models without an outside good. Comparing market and second‐best outcomes, we find that market entry is efficient in the single‐sector model. This efficiency also holds in a symmetric two‐sector setting. When sectors have asymmetric demand and the level of asymmetry is sufficiently small, the market yields excessive entry into the “high‐demand” sector. This inefficiency arises from the presence of an additional aggregator in MO preferences.