ABSTRACT
This chapter deals with some further issues in economic theory. It begins by reconsidering the claim by Kaplan and Atkinson that activity-based costing has resolved the problem of ascertaining the cost curve in the economic model of price determination. This could only be true if a sophisticated version of activity-based costing were employed.
The origins of price discrimination and welfare theory are discussed by reference to the work of Pigou, Joan Robinson and Schmalansee and a worked example demonstrates that, for two markets with linear demand functions, a discriminating monopolist produces the same output as a “pure” monopolist. In this case, assuming a new market is not opened by price discrimination, there can be no welfare difference related to output.
This leads to consideration of Ramsey prices, important in the regulation of “natural” monopolies that have very heavy infrastructure costs that must be recovered in prices.
Finally, the intricacies of demonstrating indirect price discrimination are considered and the choice between price-cost differences and ratios is explored.
