# Question

Firm 1 and firm 2 are competing for a cable television franchise. The present value of the net revenues generated by the franchise is equal to R. Each firm’s probability of winning the franchise is given by its proportion of the total spent by the two firms on lobbying the local government committee that awards the franchise. That is, if I1 and I2 represent the lobbying expenditures of firms 1 and 2, respectively, then firm 1’s probability of winning is given by I1 /(I1 + I2 ), while firm 2’s probability of winning is I2 /( I1 + I2 ). If each firm assumes that the other firm’s spending is independent of its own, what is the equilibrium level of spending for each firm?

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