Three risk-neutral firms have applied for the franchise to operate the cable TV system during

the coming year. The annual cost of operating the system is $100 and the demand curve for its

services is P=400-Q, where P is the price per subscriber per year and Q is the expected

number of subscribers. The franchise is assigned for only one year, and it allows the firm with

the franchise to charge the monopoly price for the service. The firm awarded the franchise

cannot price discriminate.

(a) If the government chooses the firm that spends the most money lobbying the government

members and firms cannot collude, what is the equilibrium strategy for each firm? For that

equilibrium strategy, what is the expected amount each firm will devote to lobbying?

Provide a detailed explanation. (4 points)

(b) Now suppose that a higher lobbying activity increases the probability of getting the rent

but does not ensure a win. If firm i spends the amount xi on lobbying activity, it will get

the franchise with probability pi = xi/(xi+x-i) where x-i stands for the lobbying activity of

all other firms. How much will each firm spend on lobbying in a symmetric equilibrium?

How much all firms spend in total? Provide a detailed proof. (4 points)

(c) Identify and discuss the differences in results between parts (i) and (ii). (2 points)