Very Preliminary and Incomplete

We analyze a model in which it is costly for firms to absorb and process information. Therefore firms choose to be rationally inatten-tive towards changes in demand for some time period. We show that the choices of the strategy variable (price vs. quantity) and the inat-tentiveness period are interrelated. Prices adapt more flexible to de-mand shocks but yield lower profits in the short run. Therefore high information costs result in price competition. In this case firms ad-just simultaneously while adjustment times differ and alternate under quantity competition. We show how the choice of the strategy variable depends on the adjustment costs and discuss possible extensions