Strategic inattention, delegation and endogenous market structure

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. The firm’s choice of ignoring the impact of its production on aggregate output, which is typical of monopolistic competition, is derived as an equilibrium choice rather than assumed upfront. Such a choice is labelled as ‘strategic inattention’. We show that our model of “strategic inattention” is isomorphic to a model of ‘strategic delegation’ with managerial compensation based on relative profit performance. Thus, monopolistic competition and Cournot oligopoly are reconciled within a general model which can lead to either market form.