Multiproduct Cost Passthrough: Edgeworth's Paradox Revisited

Mark Armstrong and John Vickers

MPRA Paper from University Library of Munich, Germany

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, and characterize which matrices of cost passthrough 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, and use it to find further examples where consumer surplus increases with cost.

Keywords: Multiproduct pricing; Edgeworth's paradox of taxation; cost passthrough; Ramsey pricing (search for similar items in EconPapers)
JEL-codes: D42 H22 L12 (search for similar items in EconPapers)
Date: 2023-01
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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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 (2022)
Working Paper: Multiproduct Cost Passthrough: Edgeworth’s Paradox Revisited (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:115898

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