Monday, October 1, 2018
Carlo Ciccarelli (DEF & CEIS,University of Rome "Tor Vergata"); Gianni De Fraja (DEF & CEIS,University of Rome "Tor Vergata", Nottingham School of Economics, CEPR); Silvia Tiezzi (Università di Siena) ask How Hard Is It to Maximise Profit? Evidence from a 19-th Century Italian State Monopoly.
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.