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

Ciccarelli CarloDe Fraja GianniTiezzi Silvia
CEIS Research Paper
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.

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Number: 434
Keywords: Demand for Tobacco, Multiproduct monopoly profit maximisation, 19-th century Italy, QAI demand system, Habit formation
JEL codes: L12,L66 I18,N33
Volume: 16
Issue: 4
Date: Tuesday, May 8, 2018
Revision Date: Tuesday, May 8, 2018