A Long-Run Analysis of Complementary and Substitutive Lobbying Activity in a Regulated Market : Welfare Implications of Negative and Positive Spillover Effects

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We present a two-stage noncooperative game model which contains both complementary and substitutive lobbying activity and a regulatory body with an extraordinary degree of discretionary power. We establish the following results: (1) While a substitutive lobbying firm can reduce its lobbying expenses more than a complementary firm, the substitutive lobbying firms quota is always smaller than that of the complementary firm. (2) The equilibrium pure-tax rate is the same in the substitutive case as in the complementary. (3) The regulators utility in the complementary case exceeds the utility in the substitutive case, and whether the substitutive firms profit is higher than the complementary ones depends on the tax rate and the degree of lobbying spillover effects. (4) The free-entry equilibrium in the substitutive case attains the second-best allocation. (5) The equilibrium number of the firms in the complementary free-entry equilibrium becomes excessive or insufficient, depending on how the tax system is constructed.
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