Abstract
Abstract In this paper, we study the ability of the 19th-century Italian government to choose profit maximizing 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 maximization: since at the time profits from tobacco were close to 10% of the revenues for the cash-strapped government, the stated aim was very likely the true one. Our empirical application uses historical price and cost data, and suggests that the government was not wide off the mark: the tobacco prices were ‘not far’ from those dictated by the multiproduct monopoly formulae for profit maximization with interdependent demand functions.
Highlights
IntroductionIn the few years after its formation in 1861, the Italian state’s revenues covered only about half of its expenditure
The rich vein of nineteenth century Italian economics did not obtain any insight on the analysis of monopoly3 and the inverse elasticity formula for a single product monopolist is more than half a century into the future (Robinson 1933, Lerner 1934)
We have instead tested the assumption of weak separability (Edgerton 1997) between tobacco and other goods and, having failed to reject the null of separability, we focus on stage two and estimate a conditional demand system for nine tobacco products (Pollak 1969)
Summary
In the few years after its formation in 1861, the Italian state’s revenues covered only about half of its expenditure. In order to charge profit maximizing prices, you need to know them. This was not an easy task, even in the conditions of textbook monopoly created for the tobacco market. Italian consumers could choose among dozens of different products, whose demands were interdependent This makes the formula much more complex (see (8) below), as the cross-substitutability among products and varieties needs to be taken fully into account to determine the profit maximizing prices. Minister Magliani, proved to be aware of this interdependence, for example when he declared in Parliament to have ‘examined each variety of tobacco, in relation to those similar to it, and to those fairly different from it, to understand the effect on sales of changes in tariff of any variety’.4. We ask the question: Was the government far from its declared goal to maximize profits from the sales of tobacco products?
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