Question

You manage a company that competes in an industry that is comprised of five equal-sized firms. A recent industry report indicates that a tariff on foreign imports would boost industry profits by $30 million—and that it would only take $5 million in expenditures on (legal) lobbying activities to induce Congress to implement such a tariff.

Indicate whether each of the following statements are true or false.

- It is an equilibrium for your company to pay the $5 million in lobbying expenses and your rivals pay nothing? True or False

- It is an equilibrium for your company to pay nothing and your rivals to collectively pay the $5 million in lobbying expenses? True or False

- It is an equilibrium for each company to pay $1 million in lobbying expenses? True or False

-Which of the following is the natural "focal point" of this game?

-Each company pays $1 million in lobbying expenses.

-Your company pays nothing and your rivals pay the $5 million in lobbying expenses.

-Your company pays the $5 million in lobbying expenses and your rivals pay nothing.

Answer 1

We need to make payoff matrix for firms,

My move. Payoff

1 Nothing. 6 M{as each firms share equal share in market}

2. Pay 1M. 5M

3. Pay 5M. 1M

A).as if my company pay all 5M then my payoff will be 1 and others have 6 M. but given rivals move , I don't want to change my decision because as i reduced it zero to 1 ,then my payoff will be zero.and rival is not paying anything ,so they don't wanna change their move ,so it is equilibrium and quote is true.

B).yes ,if if rivals change their move ,every lose will be worse off ,so no one wanna change their decision and it is equilibrium and quote is true.

C).yes ,it is true .if every one pays lobbying fee 1M so every one have a payoff 5M. And if anyone changes their action ,give rivals move ,their payoff will be lower .so it is equilibrium and quote is true.

D)natural.focal point of any game is the outcome of that game that came by default without any communication between players.

As every player know the lobbying fee 5M and also know the their are 5 players and no one wants to give more .they will think it is best for them to pay 1M and in the end every one pay 1M without communication between them .it is the natural focal point of this game