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Leamer on outsourcing and competition

In the latest EconTalk episode, I talk with Ed Leamer about outsourcing, globalization and a host of related issues. One issue that comes up is the nature of competition when goods are heterogeneous. Ed argues that in such cases, supply and demand is the wrong way to look at such products. There isn’t going to be a single price and deviations from "the" price will be tolerated because of the uniqueness of each transaction. We spar over it a bit. Here’s my attempt to make the case for markets even when every transaction is unique. Graduate students in economics will want to look at Rosen’s work on hedonics.

EDIT: When I said "make the case for markets" above, I meant "make the case for using supply and demand to understand pricing" and to treat such markets as competitive even though each transaction is unique. Leamer implies, if I understood him correctly in the podcast, that heterogeneity and long-term relationships mean that prices aren’t determined by competition and supply and demand in such situations.