Working Paper: CEPR ID: DP12907
Authors: Carlo Ciccarelli; Gianni De Fraja; Silvia Tiezzi
Abstract: In this paper we study the ability of the 19-th century Italian government to choose profit maximising prices for a multiproduct monopolist. We use very detailed historical data on the tobacco consumption in 62 Italian provinces from 1871 to 1888 to estimate a differentiated product demand system. The demand conditions and the legal environment of the period made this market as close to a textbook monopoly as is practically possible. The government's stated aim for this industry was profit maximisation: since at the time tobacco revenues constituted between 10 and 15 percent of the revenues for the cash-strapped government, the stated aim was very likely the true one. Cost data for the nine products suggest that the government was not wide off the mark: the tobacco prices were ``not far'' from those dictated by the standard monopoly formulae for profit maximisation with interdependent demand functions.
Keywords: Demand for Tobacco; Multiproduct Monopoly; Profit Maximisation; 19th Century Italy; QAI Demand System; Habit Formation
JEL Codes: L12; L66; I18; N33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government's pricing did not favor any demographic (P22) | Profit levels from tobacco sales (H27) |
| Government's price-setting did not exhibit a trend towards convergence with profit-maximizing prices (P22) | Profit levels from tobacco sales (H27) |
| Government's pricing decisions (L11) | Profit levels from tobacco sales (H27) |
| Government aimed to maximize profits from tobacco sales (H27) | Government's pricing decisions (L11) |
| Government's pricing strategy was aligned with profit-maximizing prices (L11) | Profit levels from tobacco sales (H27) |
| Prices set against costs of production (L11) | Marginal profits (D40) |
| Observed prices reflect demand conditions (E30) | Government's pricing decisions (L11) |