Multiproduct Cost Passthrough: Edgeworth's Paradox Revisited

armstrong, mark and Vickers, John (2023): Multiproduct Cost Passthrough: Edgeworth's Paradox Revisited.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Multiproduct pricing; Edgeworth's paradox of taxation; cost passthrough; Ramsey pricing
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D42 - Monopoly; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H22 - Incidence; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L12 - Monopoly ; Monopolization Strategies

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