Inattention to market shrinkage: The case of the photo film market

In the photo film market of the 2000s, Kodak's failure to sufficiently reduce production in response to market shrinkage has become a canonical example of how firms fail to adjust to market shrinkage. This seemingly optimistic response contrasts sharply with Fujifilm's response, which ultimately led it to exit the market successfully. To account for these contrasting cases, we incorporate the sparsity-based model of \citet{gabaix2014sparsity} into a textbook Cournot model in which firms are inattentive to changes in market size. We show that such inattention leads firms to respond optimistically to market shrinkage relative to the full-attention benchmark. We also show that a firm may respond pessimistically when its competitor is substantially inattentive. These results help explain Kodak's slow response and Fujifilm's relatively rapid adjustment to market shrinkage. Finally, we develop a model with endogenous attention choice, in which heterogeneity in forecast horizons and/or production cost structures generates heterogeneity in attention, a key driver of our results.