Multiproduct Cost Pass-Through: Edgeworth’s Paradox Revisited

Mark Armstrong and John Vickers

Journal of Political Economy, 2023, vol. 131, issue 10, 2645 - 2665

Abstract: Edgeworth’s paradox of taxation occurs when an increase in the unit cost of a product causes a multiproduct monopolist to reduce prices. We give simple illustrations of the paradox and a general analysis of the case of linear marginal cost and demand conditions, and we characterize which matrices of cost pass-through terms are consistent with profit maximization. When the firm supplies at least one pair of substitute products, we show how Edgeworth’s paradox always occurs with a suitable choice of cost function. We then establish a connection between Ramsey pricing and the paradox in a form relating to consumer surplus.

Date: 2023
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Related works:
Working Paper: Multiproduct Cost Passthrough: Edgeworth's Paradox Revisited (2023)
Working Paper: Multiproduct Cost Passthrough: Edgeworth's Paradox Revisited (2022)
Working Paper: Multiproduct Cost Passthrough: Edgeworth’s Paradox Revisited (2022)
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