Marginalism
In the 1870s and 1880s the controversy between the classical and the historical school also had to face the challenge of the marginalist paradigm that was slowly gaining ground (Steedman 1995).
As for its contribution to the field of IO, it has to be remembered that in 1871 William Stanley Jevons defined a perfect market as a market in which there is perfect knowledge, “perfectly free” competition (in the meaning of free entry), and no conspiracies by sellers. In contrast, in the same year Carl Menger, the founder of the Austrian school, regarded monopoly as one of the expressions of the competitive process, just like the classical thinkers. One significant aspect of this period concerns the history of the analytical tools used by economists: von Thunen, Cournot, Ellet, Dupuit and Lardner had used mathematics, leaving an inheritance of methods, tools and results to those who came after them; therefore some of the theoretical developments in IO came about through the logical necessity imposed by the formal tools they employed. This is the case of Francis Y. Edgeworth, who in 1881, following up on Cournot, set out the first duopoly model of price competition with product homogeneity. Edgeworth was also the first to list certain conditions needed in order to compete, namely, free communication, divisibility of goods, and a large number of sellers. Joseph L.F. Bertrand is also linked to Cournot: he is credited with the formulation in 1883 of the price undercutting mechanism as an alternative to quantity competition. Actually, Bertrand wrongly attributed to Cournot a confusion between quantity and price competition; but in fact the paternity of the formal treatment of price competition is to be attributed to Wilhelm Launhardt in 1885, whose duopoly model with horizontal differentiation produces a price equilibrium which encompasses the so-called Bertrand paradox (Lambertini and Mosca 2015). In 1889 Rudolf Auspitz and Richard Lieben, who also built on the mathematical work of the previous generation, incorporated monopoly into a general equilibrium framework (Niehans 1990). To sum up, in this decade the idea of different market structures made headway, without however crowding out the classical idea of competition as a dynamic process.