Question

The Newby Co. is considering entering a market with an incumbent monopolist Ogden Inc. Ogden knows this, but also knows that, before Newby enters, it can spend B dollars lobbying for a law requiring that any new entrant to its market spend T dollars on the latest pollution abatement equipment, an expenditure Ogden would avoid by getting lawmakers to include a grandfathering provision.

a. Suppose that if no entry occurs, Newby will earn no profit, πe = 0, and Ogden will earn monopoly profits, πM > 0, minus any lobbying expenditure it makes. If Newby enters, however, each firm earns the Cournot duopoly profit, πd, minus any costs for pollution equipment or lobbying the firm incurs. Sketch the game tree.

b. If Ogden lobbies, under what conditions (in terms of πe, πM, B, or T) will Newby NOT enter?

c. If Newby will not enter when Ogden lobbies, under what conditions (in terms of πe, πM, B, or T) will Ogden lobby?

Answer 1

A. The whole game tree is shown below.

ogle = 10:B. . YES perby To T 1 Entry ....Alaagden.m.. ...Newbyz....... . . . . . . . . . . . . . . . . .... Lobbying Oglen=sta A Meldal...... Entry i ...powtoons Teol

If Ogden lobbies and Newby enters, Odgen will make profits of $\Pi _{d}-B$ , Newby will make profits of $\Pi _{d}-T$ .

B. Newby will not enter if $\Pi _{d}<T$

C. Ogden will lobby as long as $\Pi _{m}-\Pi _{d}>B$ , which means as long as the benefit arising from lobbying is greater than the cost of lobbying.