How Hard Is It to Maximize Profit? Evidence from a 19th century Italian State Monopoly

Ciccarelli, Carlo; De Fraja, Gianni; Tiezzi, Silvia

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 maximisation: 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 maximisation with interdependent demand functions.

Citation

Ciccarelli, C., De Fraja, G., & Tiezzi, S. (2021). How Hard Is It to Maximize Profit? Evidence from a 19th century Italian State Monopoly. Oxford Economic Papers, 73(2), 879–902. https://doi.org/10.1093/oep/gpz076

• Journal Article Type: Article
• Acceptance Date: Nov 18, 2019
• Online Publication Date: Jan 3, 2020
• Publication Date: 2021-04
• Deposit Date: Dec 3, 2019
• Publicly Available Date: Jan 4, 2022
• Journal: Oxford Economic Papers
• Print ISSN: 0030-7653
• Electronic ISSN: 1464-3812
• Publisher: Oxford University Press
• Peer Reviewed: Peer Reviewed
• Volume: 73
• Issue: 2
• Pages: 879–902
• DOI: https://doi.org/10.1093/oep/gpz076
• Public URL: https://nottingham-repository.worktribe.com/output/3464653
• Publisher URL: https://academic.oup.com/oep/article-abstract/73/2/879/5695679?redirectedFrom=fulltext
• Additional Information: This is a pre-copyedited, author-produced version of an article accepted for publication in Oxford Economic Papers following peer review. The version of record Carlo Ciccarelli, Gianni De Fraja, Silvia Tiezzi, How hard is it to maximize profit? Evidence from a 19th-century Italian state monopoly, Oxford Economic Papers, , gpz076 is available online at: https://doi.org/10.1093/oep/gpz076