Multiproduct Cost Passthrough: Edgeworth's Paradox Revisited

Mark Armstrong and John Vickers

No 17202, CEPR Discussion Papers from Centre for Economic Policy Research

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, including how it can arise with uniform pricing. We then give a general analysis of the case of linear marginal cost and demand conditions, showing how the matrix of cost passthrough terms is similar to a positive definite matrix, and so has positive eigenvalues. When the firm supplies two 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, and use it to find further examples where consumer surplus increases with cost.

Keywords: Multiproduct pricing; Edgeworth's paradox of taxation; Cost passthrough; Price discrimination; Ramsey pricing (search for similar items in EconPapers)
JEL-codes: D42 H22 L12 (search for similar items in EconPapers)
Date: 2022-04
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Related works:
Journal Article: Multiproduct Cost Pass-Through: Edgeworth’s Paradox Revisited (2023)
Working Paper: Multiproduct Cost Passthrough: Edgeworth's Paradox Revisited (2023)
Working Paper: Multiproduct Cost Passthrough: Edgeworth’s Paradox Revisited (2022)
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