I put what I actually did in the situation down to "a learning experience" and wasn't particularly proud of the outcome.
Dubtrub: rule 39(3) didn't help because No. 1 was ignoring it.
The problem, as
FNG suggested is getting a balance between rules, common sense (safety) and experienced judgement to inform the decision. It had nothing to do with the money, as
IO540 suggested, but everything to do with whether I extend the circuit or "Nip in" as
Stiknruda suggested, to maintain a reasonable circuit.
I decided to "nip in". I turned base, informed ATC who replied "Call final". On final, at about 50' and having called "Final to land", I suddenly hear the now no. 2 call "going round because some is now in front of me". Clearly I had either misjudged the distance of the other aircraft or had failed to see the correct one altogether. I believe we were not close enough to cause danger, and no-one said anything else, but the other guy probably saw me as having "pushed in", which I had.
My conclusion is that, unless you're an experienced Pitts pilot like Stiknruda (correct?), follow the one in front. You can always go round if you get too close.