Did the Swedish Tobacco Monopoly Set Monopoly Prices?

Research output: Contribution to journalJournal articleResearchpeer-review

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.
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.
LanguageEnglish
JournalEconomica
Volume85
Issue number339
Pages532-557
Number of pages26
ISSN0013-0427
DOIs
StatePublished - Jul 2018

Cite this

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title = "Did the Swedish Tobacco Monopoly Set Monopoly Prices?",
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.",
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Did the Swedish Tobacco Monopoly Set Monopoly Prices? / Asplund, Marcus.

In: Economica, Vol. 85, No. 339, 07.2018, p. 532-557.

Research output: Contribution to journalJournal articleResearchpeer-review

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