How Hard is it to Maximise Profit? Evidence From a 19-th Century Italian State Monopoly

34 Pages Posted: 10 May 2018 Last revised: 17 May 2018

See all articles by Carlo Ciccarelli

Carlo Ciccarelli

University of Rome Tor Vergata - Faculty of Economics

Gianni De Fraja

University of Nottingham; Universita' di Roma; Centre for Economic Policy Research (CEPR)

Silvia Tiezzi

University of Siena - Department of Economics and Statistics

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Date Written: May 8, 2018

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.

Keywords: Demand for Tobacco, Multiproduct monopoly profit maximisation, 19-th century Italy, QAI demand system, Habit formation

JEL Classification: L12, L66, I18, N33

Suggested Citation

Ciccarelli, Carlo and De Fraja, Gianni and Tiezzi, Silvia, How Hard is it to Maximise Profit? Evidence From a 19-th Century Italian State Monopoly (May 8, 2018). CEIS Working Paper No. 434. Available at SSRN: https://ssrn.com/abstract=3175345 or http://dx.doi.org/10.2139/ssrn.3175345

Carlo Ciccarelli (Contact Author)

University of Rome Tor Vergata - Faculty of Economics ( email )

Via Columbia n.2
Rome, rome 00100
Italy

Gianni De Fraja

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

Universita' di Roma ( email )

Dipartimento SEFEMEQ
Via Columbia n.2
Rome, Rome 00133
Italy

HOME PAGE: http://www.economia.uniroma2.it/docenti

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Silvia Tiezzi

University of Siena - Department of Economics and Statistics ( email )

Piazza San Francesco 7
Siena, Siena 53100
Italy

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