Exploitative routing of exchanging rates in capital transaction by price setters
suppose there are two kind of capital X,Y
A & B produce same products Z by X,Y with Cobb-Douglas production function
Z=X^0.55 Y^0.45
A has relative excess of X, B has relative excess of Y,
As the graph shows,
Blue lines: isoquant curves
A,B point: original (X,Y) resources A,B owns
When Pareto optimum arrived, the final transaction rates will equalize slope of red lines
If A, B transact capital resource X,Y with final substitution rates, they will reach A1, B1 point
However, if A is price setter, B is price taker,
A could routing along B's isoquant curves sequentially with different transact rates,
and final points will be A2, B2.
Besides, if they initially exchage with the slope/price of A-A2, B-B2 directly,
they will stop within the line A-A2, B-B2 without reaching Pareto optimum.
Due to the cumulative(storage) property of capitals, price setters can exploit price takers finally.
When applied to products, their flow property will not let this kind of exploitation persists after repeated games.
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