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. Discuss your strategy for improving your company’s profits

Short answer

The strategy to improve the company’s profit is to spend $1 million on lobbying activity to implement the tariff.

Step-by-step solution

The Game

Lobbying requires an expenditure of $5 million in total. So, each firm indulging in the activity would have to bear the share of the expenditure. If only my firm indulges in the activity, then it has to bear the whole cost, but if all the five firms take part as a whole, then each of them has to pay $1 million dollars each.

My Firm

Other Firm

Strategy	Lobby	Not Lobby
Lobby	$5, $5	$0, $6.25
Not lobby	$25, $0	$0, $0

Conclusion

Here, it can be seen that if my Firm doesn’t lobby then in both cases, it will receive $0 million profit. Hence, the company will indulge in lobbying activities. If other firms indulge in it as well then, my firm would receive only $5 million in profit and if they choose not to lobby then My firm will receive $25 million in profit.

Hence, it can be concluded that my company will choose the strategy to indulge in lobbying activities.