The first prerequisite for a firm to practice price discrimination is the existence of monopoly power, which the Church had acquired by the Middle Ages. The medieval church took on the posture of a vertically integrated, dominant firm, capable of engaging in product innovation, differentiation, and development.10 From the twelfth century on, it introduced doctrinal innovations that encouraged and facilitated the practice of price discrimination. Through these innovations, church managers were able to manipulate both the quality of their product (i.e., the solidarity of its redemptive promise), and the full price of membership in its spiritual body.
The second prerequisite for price discrimination is separable markets. Arbitrage means buying in one market for simultaneous sale in another. If arbitrage is possible, price discrimination will break down. Separation of markets is, of course, easier to achieve with services than with tangible products. The Church issued general rules and regulations respecting the redemption of souls, but local bishops, and especially parish priests, interpreted and applied these rules. The establishment of the requirement of auricular confession (ultimately mandated at least once a year for all church members) provided an efficient means of levying discriminatory tariffs on penitents. The intimate, small-scale nature of medieval towns and villages allowed priests to determine income profiles and other personal information about their parishioners.11
Finally, price discrimination requires the absence of available substitutes, and variations in the elasticity of demand across customers. Elasticity of demand refers to the intensity of wants. That different groups of customers had different demand elasticities is self-evident. The stronger one's belief in the afterlife, the more intense is the demand to achieve heaven. There were also strong social pressures to belong to the medieval church, especially for monarchs, aristocrats, and other people of wealth. The practice of papal investiture, which gave popes veto power over monarchs, meant that a good relation with the Church, at least formally, was often prerequisite to acceptance by the governed. Throughout the Middle Ages, the church and secular authorities were constantly vying for the upper hand. By 1516, French, Portuguese, and Spanish monarchs had complete control over the naming of Catholic bishops in their domains, so it was not always clear who controlled whom, but the pressure to belong to the church remained strong among the wealthy.
Social and economic pressures constrained the wealthy to few religious alternatives, but the poor had considerably more options, and therefore much higher demand elasticity. Their access to popular heresies (such as those found in southern France and Italy) and superstitions, especially those trailing the wake of the Black Death, created a number of substitutes that did not transfer across social strata to wealthier individuals. Equally evident in medieval society was the dearth of practical substitutes. Judaism was not a proselytizing religion, and, except for lingering Muslim influence in Spain, Islam was confined to the periphery of the European continent.
Successive doctrinal innovations quickened and intensified the practice of price discrimination by the medieval church, as indulgences, auricular confession, the dichotomy between moral and venial sins, and a number of other doctrinal practices provided more opportunities to extract rents from the faithful. One example involved opportunistic use of the usury doctrine. Since church doctrine treated usury as theft, confessors customarily withheld forgiveness until restitution was made. Often, the amount of restitution was based on the usurer's wealth. In the case of deathbed restitution, the Church took the money if the usurer was uncertain (incerta) about the identity of the wronged parties, which was a common occurrence.12
The explicit payment schedules for indulgences demonstrate the economic sophistication of the church managers. Product innovations of the Church were relatively new when it began to link price discrimination with indulgences to encourage participation in the Crusades. Gregory VIII was apparently the first pope to obtain money in this fashion, but his successors learned quickly. For example, in 1188 Pope Clement ordered the archbishop of Canterbury to command subsidies from the faithful for which the bishop "was empowered to grant them remission of sins proportioned to the 'quality of the person and the quantity of the subvention.'''13 The collection and handling of monies from these partial indulgences became increasingly efficient throughout the twelfth century (beginning with Pope Innocent III). As the Middle Ages wore on, rent seeking through the sale of indulgences (for crusading and a variety of purposes) accelerated throughout Europe. Papal bulls countenanced differential pricing with regard to the granting of indulgences. Lunt describes a three-tiered system whereby the highest price was paid by the wealthy, an intermediate price by middle-class members, and a low price by the poor.14 In Scotland a five-tier pricing schedule was imposed for the jubilee year of 1475.15 New devices for collection and refined schedules were a hallmark of rent seeking in the later period. Pope Alexander VI (1492-1503) routinely directed papal agents to press the faithful for more "donations."
Papal agents also showed considerable sophistication in devising price-discriminatory schemes. For example, Jasper Ponce, the papal agent to England during the late fifteenth and early sixteenth centuries, developed a schedule of "gifts" for a plenary indulgence with three categories of givers (laymen owning substantial real property, laymen owning substantial movable property, and clergy owning substantial real property). Each category contained four to seven differentiated tariffs based on personal income.16 Ponce and his deputies were given complete power for the absolution of all sins, mortal and venial, excepting only those committed directly against the papacy itself.17 During the reign of Henry VII, the same principles were incorporated into the establishment of a "jubilee indulgence'' in 1501. This last schedule is replicated below as table 5.1. This kind of evidence confirms that the medieval church was engaging in (second-degree) price discrimination. Economist Sam Peltz-man has taught us that opportunities for increasing producer wealth through price discrimination are never fully exploited because complete exploitation would narrow the consumer base of the monopoly's constit-uency.18 This was no less true in the Middle Ages, when the invention of purgatory made it easier for the medieval church to levy huge taxes on wealthy sinners, making Protestant entry easier, other things equal. But entry occurred on a selective basis, as we shall demonstrate momentarily.
There is, of course, no self-selection here—one's income or the real value of his property is determined a priori—but the monopolist sets out charges ex ante on finely graded income classes. Note that the wealthiest property owners were charged the highest amounts regardless of whether their property was fixed or movable. Moreover, clergy were not spared the indulgence tax—if anything, the tax was stiffer on prelates and monasteries. The rich paid dearly, and only the poorest escaped with payments geared to "their level of devotion," indicating a high degree of price discrimination.
While the schedule shown in table 5.1 was produced specifically for England, papal agents used a variety of taxes throughout Christendom. Judging from the papal records, fraud was common and malfeasance
Papal bull establishing jubilee indulgences in England, 1501
Fixed property (tenements, rents, etc.) Rates of levy
(all individuals earning above £2,000 per annum) £3, 6s., 8d. Fixed property (secular)
Fixed property > £40 plus movable property > £1,000 40s. (secular)
Movable property (secular)
Source: William E. Lunt, Papal Revenues in the Middle Ages, vol. 2 (New York: Columbia University Press, 1934), 481-482.
was dealt with severely through excommunication. Typically, chests were installed in churches where the faithful might deposit offerings for the forgiveness of sins. Three different keys were required to open the chest: one was held by the bishop, another by the parish priest, and a third by a devout laymen.19 Around 1512, wealthy banking families, such as the German Fuggars, became papal agents for the collection of indulgence receipts and other forms of taxes.20 These agents had sweeping powers. The kind and severity of taxes multiplied as the Middle Ages wore on. Temporary levies became permanent, and many new taxes were imposed on the wealthiest church members. Church documents reveal that sons and grandsons of heretics had to pay up for the sins of their fathers, "compounded at least at 25 ducats if poor, otherwise, as much as can be had.''21 Vows and oaths were commuted on payment (except those relating to chastity or religious orders), the souls of deceased relatives could be extricated from purgatory for fees, and those leaving money or gifts for crusades "in their wills would receive an indulgence proportioned to the quality of their persons and the extent of their resources.''22 Historians agree that the market for indulgences provided the church an important means of extracting wealth from the faithful. Another market that provided rent-seeking opportunities for the medieval church, although less emphasized by historians, is the marriage market. In the Middle Ages, the most prominent device for accumulating wealth, especially landed property, was the dynastic family. Marriages were arranged with this in mind. Endogamy regulations established who could marry within a kinship group, or degree of "blood." Marriage between brother and sister was a first-degree relation, between first cousins, a second-degree relation, and so forth. The medieval church found an opportunity to manipulate these regulations in its interest. It could extract higher payments from dynastic families by attaching "redemptive promises'' to the marriage contract. Consanguinity exemptions were paid for by the wealthy, not the poor, who were permitted to plead in forma pauperum,23 yet another manifestation of a high degree of price discrimination. The threat of excommunication for lying about one's income served as an enforcement mechanism. Marriages based on kinship as high as the seventh degree were prohibited, making it easy to find (or manufacture) an illegal tie. In his analysis of papal financial records, Lunt uncovered the fact that Maximillian, Duke of Austria and Burgundy, paid 2,250 ducats for a matrimonial dispensation, a considerable sum during the Middle Ages.24 Strong evidence that exemptions for endogamy were routinely granted to the aristocracy for high prices or for political favors has also been presented by medieval historian Georges Duby25 and by economists Audrey B. Davidson and Robert B. Ekelund Jr.26 Differential punishments levied for these and other victimless crimes such as usury suggest again that neither optimal deterrence nor efficient punishment were immediate goals of church policy. Rent seeking rather than welfare maximization appears to have driven the Church's actions.
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