How hard is it to maximize profit? Evidence from a 19th-century Italian state monopoly

Author:

Ciccarelli Carlo1ORCID,De Fraja Gianni2ORCID,Tiezzi Silvia3ORCID

Affiliation:

1. Department of Economics and Finance, University of Rome Tor Vergata, Via Columbia 2, Rome, I-00133, Italy

2. Nottingham School of Economics, Sir Clive Granger Building, University Park, Nottingham, NG7 2RD, UK; University of Rome Tor Vergata, Department of Economics and Finance, Via Columbia 2, I-00133, Rome, Italy; and C.E.P.R, 90-98 Goswell Street, London, EC1V 7DB, UK

3. University of Siena, Department of Economics and Statistics, Piazza San Francesco 7, Siena, I-53100, Italy

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.

Publisher

Oxford University Press (OUP)

Subject

Economics and Econometrics

Reference63 articles.

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