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Multiproduct Cost Pass-Through: Edgeworth’s Paradox Revisited

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  • Mark Armstrong
  • John Vickers

Abstract

Edgeworth’s paradox of taxation occurs when an increase in the unit cost of a product causes a multiproduct monopolist to reduce prices. We give simple illustrations of the paradox and a general analysis of the case of linear marginal cost and demand conditions, and we characterize which matrices of cost pass-through terms are consistent with profit maximization. When the firm supplies at least one pair of substitute products, we show how Edgeworth’s paradox always occurs with a suitable choice of cost function. We then establish a connection between Ramsey pricing and the paradox in a form relating to consumer surplus.

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  • Mark Armstrong & John Vickers, 2023. "Multiproduct Cost Pass-Through: Edgeworth’s Paradox Revisited," Journal of Political Economy, University of Chicago Press, vol. 131(10), pages 2645-2665.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/724573
    DOI: 10.1086/724573
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    References listed on IDEAS

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    1. Edlin, Aaron S. & Shannon, Chris, 1998. "Strict Monotonicity in Comparative Statics," Journal of Economic Theory, Elsevier, vol. 81(1), pages 201-219, July.
    2. Mark Armstrong & John Vickers, 2018. "Multiproduct Pricing Made Simple," Journal of Political Economy, University of Chicago Press, vol. 126(4), pages 1444-1471.
    3. Jeanine Miklós-Thal & Greg Shaffer, 2021. "Pass-Through as an Economic Tool: On Exogenous Competition, Social Incidence, and Price Discrimination," Journal of Political Economy, University of Chicago Press, vol. 129(1), pages 323-335.
    4. Yongmin Chen & Marius Schwartz, 2015. "Differential pricing when costs differ: a welfare analysis," RAND Journal of Economics, RAND Corporation, vol. 46(2), pages 442-460, June.
    5. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528-583.
    6. Salinger, Michael A, 1991. "Vertical Mergers in Multi-product Industries and Edgeworth's Paradox of Taxation," Journal of Industrial Economics, Wiley Blackwell, vol. 39(5), pages 545-556, September.
    7. Harold Hotelling, 1932. "Edgeworth's Taxation Paradox and the Nature of Demand and Supply Functions," Journal of Political Economy, University of Chicago Press, vol. 40(5), pages 577-577.
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    Cited by:

    1. Dertwinkel-Kalt, Markus & Wey, Christian, 2023. "Resale price maintenance in a successive monopoly model," DICE Discussion Papers 395, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    2. Carsten Eckel & Lisandra Flach & Ning Meng, 2023. "Demand and Supply Side Linkages in Exporting Multiproduct Firms," Rationality and Competition Discussion Paper Series 456, CRC TRR 190 Rationality and Competition.
    3. Anna D'Annunzio & Antonio Russo, 2022. "Ad Valorem Taxation in a Multiproduct Monopoly," CESifo Working Paper Series 9881, CESifo.
    4. Anna D'Annunzio & Antonio Russo, 2022. "Welfare-Enhancing Taxation and Price Discrimination," CESifo Working Paper Series 10007, CESifo.
    5. D’Annunzio, Anna & Russo, Antonio, 2024. "Platform Transaction Fees and Freemium Pricing," TSE Working Papers 24-1569, Toulouse School of Economics (TSE).

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    More about this item

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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