To Know or Not To Know: Strategic Inattention and Endogenous Market Structure

Quaderni - Working Paper DSE N° 987

27 Pages Posted: 15 Jan 2015 Last revised: 2 Mar 2015

See all articles by Roberto Cellini

Roberto Cellini

University of Catania - Department of Economics and Business

Luca Lambertini

University of Bologna - Department of Economics

Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation

Date Written: January 14, 2015

Abstract

We model an industry in which a discrete number of firms choose the output of their differentiated products deciding whether or not to consider the impact of their decisions on aggregate output. We show that two threshold numbers of firms exist such that: below the lower one there is a unique equilibrium in which all firms consider their aggregate impact as in standard oligopoly; above the higher threshold there is a unique equilibrium in which all firms disregard that impact as in standard monopolistic competition; between the two thresholds there are two equilibria, one in which all firms consider their aggregate impact and the other in which they do not. We then show that our model of 'strategic inattention' is isomorphic to a model of 'strategic delegation' with managerial compensation based on relative profit performance.

Keywords: information, strategic interaction, monopolistic competition, oligopoly, delegation

JEL Classification: D43, L13

Suggested Citation

Cellini, Roberto and Lambertini, Luca and Ottaviano, Gianmarco I.P., To Know or Not To Know: Strategic Inattention and Endogenous Market Structure (January 14, 2015). Quaderni - Working Paper DSE N° 987, Available at SSRN: https://ssrn.com/abstract=2549458 or http://dx.doi.org/10.2139/ssrn.2549458

Roberto Cellini (Contact Author)

University of Catania - Department of Economics and Business ( email )

Corso Italia 55
95129 Catania, 95129
Italy
+390957537728 (Phone)
+390957537710 (Fax)

Luca Lambertini

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy
+39 051 2092600 (Phone)
+39 051 2092664 (Fax)

Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation ( email )

Via Gobbi 5
Milan, 20136
Italy

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