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How Hard Is It to Maximise Profit? Evidence from a 19-th Century Italian State Monopoly

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  • Ciccarelli, Carlo
  • De Fraja, Gianni
  • Tiezzi, Silvia

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.

Suggested Citation

  • Ciccarelli, Carlo & De Fraja, Gianni & Tiezzi, Silvia, 2018. "How Hard Is It to Maximise Profit? Evidence from a 19-th Century Italian State Monopoly," CEPR Discussion Papers 12907, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12907
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    References listed on IDEAS

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    1. Gregory J. Colman & Dahlia K. Remler, 2008. "Vertical equity consequences of very high cigarette tax increases: If the poor are the ones smoking, how could cigarette tax increases be progressive?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(2), pages 376-400.
    2. Vecchi, Giovanni, 2017. "Measuring Wellbeing: A History of Italian Living Standards," OUP Catalogue, Oxford University Press, number 9780199944590.
    3. Cornes,Richard, 1992. "Duality and Modern Economics," Cambridge Books, Cambridge University Press, number 9780521336017, July - De.
    4. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, March.
    5. Diewert, W. E. & Wales, T. J., 1988. "A normalized quadratic semiflexible functional form," Journal of Econometrics, Elsevier, vol. 37(3), pages 327-342, March.
    6. Asplund, Björn Marcus, 2007. "A Test of Profit Maximization," CEPR Discussion Papers 6177, C.E.P.R. Discussion Papers.
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    More about this item

    Keywords

    19-th century Italy; Demand for Tobacco; Habit formation; Multiproduct monopoly profit maximisation; QAI demand system;

    JEL classification:

    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco
    • N33 - Economic History - - Labor and Consumers, Demography, Education, Health, Welfare, Income, Wealth, Religion, and Philanthropy - - - Europe: Pre-1913

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