Cooperation in a differentiated duopoly when information is dispersed: A beauty contest game with endogenous concern for coordination

The paper provides a micro-founded differentiated duopoly illustration of a beauty contest, in which the weight put on the strategic vs. the fundamental motive of the payoffs is not exogenous but may be manipulated by the players. We emphasize the role of the competition component of the strategic motive as a source of conflict with the fundamental motive. This conflict, already present in an oligopolistic setting under perfect information, is only exacerbated when information is imperfect and dispersed. We show how firm owners ease such conflict by opting for some cooperation, thus moderating the competitive toughness displayed by their managers. By doing so, they also influence the managers’ strategic concern for coordination and consequently the weight put on public relative to private information