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Discussion Paper Details

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

Author(s): Carlo Ciccarelli, Gianni De Fraja and Silvia Tiezzi

Publication Date: May 2018

Keyword(s): 19-th century Italy, Demand for Tobacco, Habit formation, Multiproduct monopoly profit maximisation and QAI demand system

Programme Area(s): Economic History and Industrial Organization

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.

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Bibliographic Reference

Ciccarelli, C, De Fraja, G and Tiezzi, S. 2018. 'How Hard Is It to Maximise Profit? Evidence from a 19-th Century Italian State Monopoly'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12907