Chapter 32: The Role of Numbers in Competition
John Creedy Edgeworth (1881) began his analysis of exchange by considering barter between two individuals. His model was based on the framework introduced by Jevons (1871/1957), who restricted his attention to price-taking equilibria where all units are exchanged at the same price ratio. Jevons confessed that he was unable to represent the model diagrammatically, but Edgeworth rapidly introduced the concepts of indifference curves and the contract curve, specifying a range of ‘efficient exchanges’ of goods between individuals.1 The essential feature from Edgeworth’s point of view is precisely that there is a range, rather than a unique point: ‘the settlements are represented by an indefinite number of points’ (1881, p.29). Hence in barter the rate of exchange is ‘indeterminate’. The rate of exchange achieved in practice will thus depend to a large extent on bargaining strength. The central problem that Edgeworth tried to resolve concerned the conditions necessary to remove this indeterminacy. The question naturally arises as to the extent to which it results from the absence of competition in the simple two-person market. Edgeworth thus quickly moved on to the introduction of further pairs of traders. His analysis involved the use of his ‘Edgeworth box’ apparatus, but was extremely terse. The following discussion does not therefore follow his own presentation. The analysis of barter with numerous traders involves Edgeworth’s stylised description of the process of barter: this is the famous ‘recontracting’ process. He supposed that transaction costs can be ignored and that knowledge of the other traders’ dispositions and resources...
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