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Multiproduct Cost Pass-Through: Edgeworth’s Paradox Revisited

Author

Listed:
  • 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.

Suggested Citation

  • 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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    Cited by:

    1. Carsten Eckel & Lisandra Flach & Ning Meng, 2026. "Demand and Supply Linkages in Exporting Multiproduct Firms," CESifo Working Paper Series 12530, CESifo.
    2. Anna D'Annunzio & Antonio Russo, 2022. "Welfare-Enhancing Taxation and Price Discrimination," CESifo Working Paper Series 10007, CESifo.
    3. D’Annunzio, Anna & Russo, Antonio, 2024. "Platform Transaction Fees and Freemium Pricing," TSE Working Papers 24-1569, Toulouse School of Economics (TSE).
    4. Markus Dertwinkel‐Kalt & Christian Wey, 2024. "Resale Price Maintenance in a Successive Monopoly Model," Journal of Industrial Economics, Wiley Blackwell, vol. 72(2), pages 729-761, June.
    5. Anna D’Annunzio & Antonio Russo, 2025. "Taxation, Revenue Sharing and Price Discrimination," CSEF Working Papers 761, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    6. Eckel, Carsten & Flach, Lisandra & Meng, Ning, 2023. "Demand and Supply Side Linkages in Exporting Multiproduct Firms," CEPR Discussion Papers 18627, C.E.P.R. Discussion Papers.
    7. Anna D'Annunzio & Antonio Russo, 2022. "Ad Valorem Taxation in a Multiproduct Monopoly," CESifo Working Paper Series 9881, CESifo.
    8. Mr. Ruud de Mooij & Mr. Shafik Hebous & Mr. Michael Keen, 2025. "Efficiency Aspects of the Value Added Tax," IMF Working Papers 2025/165, International Monetary Fund.
    9. Robert Somogyi, 2024. "Monopoly pricing with dual‐capacity constraints," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 33(1), pages 155-174, January.

    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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