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

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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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  • Carlo Ciccarelli & Gianni De Fraja & Silvia Tiezzi, 2018. "How Hard Is It to Maximise Profit? Evidence from a 19-th Century Italian State Monopoly," CEIS Research Paper 434, Tor Vergata University, CEIS, revised 08 May 2018.
    • Handle: RePEc:rtv:ceisrp:434
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    1. Xinyu Hou & Puyang Sun, 2023. "The impact of dismantling state monopoly on market integration: Evidence from the edible salt reform in China," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(3), pages 589-609, July.

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    More about this item

    Keywords

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

    JEL classification:

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

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