Strategic Inattention and Divisionalization in Duopoly

Author: Promit Kanti Chaudhuri

Title: Strategic Inattention and Divisionalization in Duopoly

Abstract: In this paper, a differentiated product economy is modeled where firms strategically set up autonomous rival divisions and the divisions play the quantity competition game `a la Cournot or by means of monopolistic competition, where the divisions are unaware of the impact of their output either on the firm’s total output or on the total industry output. This case of divisions being unaware of the impact of their outputs on the firm’s aggregate output or on the industry total output is termed as ‘Strategic Inattention’. The incentive to divisionalize still remains within the firms even in the case of the ‘Strategic Inattention’, but the incentive is lower than the case of normal Cournot competition. Next in a duopoly, the firms play a three stage game. In the first stage, the firms decide whether to let their divisions utilize or ignore the information on the impact of their individual output on the firm’s total output or industry total output. In the second stage the firms strategically decide on the number of divisions and in the final stage the divisions compete against each other in terms of quantity. It is seen that one firm deciding to be inattentive to the information available and the other firm using that information, is the equilibrium outcome. Thus inattentive and attentive firms coexist in a Subgame Perfect Nash Equilibrium. This result is in sharp contrast to the findings of Cellini et al. (2020).

Keywords: Divisionalization, Information, Monopolistic Competition, Oligopoly, Strategic Interaction

JEL Code: D43;L11;L13