Did the Swedish Tobacco Monopoly Set Monopoly Prices?

26 Pages Posted: 12 Jun 2018

See all articles by Marcus Asplund

Marcus Asplund

London Business School - Department of Economics; Göteborg University - School of Business, Economics and Law; Centre for Economic Policy Research (CEPR)

Date Written: July 2018

Abstract

Empirical evidence is scarce on whether firms set profit‐maximizing prices, as these typically depend delicately on details of difficult‐to‐observe strategic interactions. To avoid this problem, this paper provides a detailed case study of the Swedish Tobacco Monopoly's pricing with data from 1916 to 1959. Prices are found to be below those that maximize the expected net present value of profits. However, the difference between actual and optimal price diminishes over time, and towards the end of the period the two are almost indistinguishable. The net present value of actual profits is approximately 60% of what could have been obtained. Overall, the pricing patterns appear more consistent with the firm learning about demand conditions than being the result of maximization of something other than profits.

Suggested Citation

Asplund, Marcus, Did the Swedish Tobacco Monopoly Set Monopoly Prices? (July 2018). Economica, Vol. 85, Issue 339, pp. 532-557, 2018. Available at SSRN: https://ssrn.com/abstract=3192680 or http://dx.doi.org/10.1111/ecca.12215

Marcus Asplund (Contact Author)

London Business School - Department of Economics ( email )

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Göteborg University - School of Business, Economics and Law ( email )

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Sweden
+46 31 773 2553 (Phone)
+46 31 773 1326 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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