Why should the economy be competitive ?
Hugues Bersini (ULB, IRIDIA)
Nicolas van Zeebroeck (ULB, SBS-EM, ECARES)
Artificial Economics 2011
The Hague, Sept 2, 2011
1
Why should we be competitive ?

A ethically grounded
endeavor to demystify
competition

Competition is generally
defended on rational basis in
biology
2
Why is economy competitive ?

One often tends to see many virtues in competition

As economists, we tend to love competition
because it is known to lead to efficiency or
optimal allocation, i.e. to the most productive
use and allocation of resources possible

But competition also leads to larger inequalities

Therefore as economists we tend to advocate
that a sound economic policy should aim
(1)
(2)
At maximising social welfare,
At redistributing to reduce the inequalities resulting from competition
3
Why is economy competitive ?

Some things that we know:




Competitive markets lead to optimal efficiency (see e.g. Gode and Sunder 1993)
They do so even when agents are zero-intelligent, so long as they face a budget
constraint (Gode and Sunder 1993)
There is a trade-off between efficiency and equality, which creates a need for
redistribution mechanisms (e.g. Sen 1973; Okun 1975)
Things that we know relatively less about:

What features of competitive markets trigger or foster inequalities among agents?




And how does the behavior of agents affect inequality?
By giving up competitive market structures, would the loss in efficiency be
proportional to the gain in equality?
Can we come up with a market structure that would maximize equality without
departing too much from efficiency, and what would be the role of information in
such setting?
And the big underlying (philosophical/political) question:

What should we aim to maximize for the higher good of society?
4
Our experiment


A general object-oriented agent-based model that can be easily adapted to
test and compare the emerging properties of different market structures and
different agent behaviors
What we measure:



Social welfare, defined as the sum of money and utility accumulated across agents
Welfare distribution, defined as the Gini index of money, or utility, or both
How we proceed:




Create pairs of ‘worlds’

Competitive market = double auction market

Random market = random matching mechanism bounded by budget constraint, skills
(costs) and tastes (utility)
Run simulation over thousands of ticks with random skills & tastes distributions

Always run in parallel the 2 worlds with the exact same initial conditions and agents
Pairwise comparisons of welfare and distribution at the end of each simulation between worlds
Test robustess of results to varying initial parameters and specifications over hundreds of
simulations
5
How we depart from the literature?



Within-market studies v. our comparative study across
different market structures
Focus on inequality, not just efficiency
Look at impact of agents’ rationality (i.e. which
information do they use in their choices) on inequality

Agent’s responsibility in the inequalities we observe?
6
Our main observations

Whatever the initial conditions and agent behaviors:



Competitive market creates superior welfare (not surprisingly) in the order
of 50% more welfare than random market
Competitive market creates considerably more inequalities, in the order of
200 to 400% more inequalities than random market
The rationality and behavior of agents does not affect efficiency
too much (consistently with Gode and Sunder 1993), but they
can impact inequalities very significantly
7
Our stylized market models
8
UML Class Diagram
0…*
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Products and agents

Agents have tastes for each product in the product
space, which determine the amount of utility they enjoy
from consuming one unit of the product


Agents have skills in producing each product, which
determine the costs they incur to produce one unit of the
product


The sum of tastes across products is 1 for each agent
The sum of skills across products is 1 for each agent
Skills and tastes are distributed randomly at the
beginning of each simulation

Agents are always identical in the two markets created in a
simulation
10
At each tick
Consumption
Production
Money and
product
transfer
Allocation
(Transaction
Selection)
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Agents’ choices

Producers: have to select which product to make


Either randomly (they pick a random product to produce
and produce it so long as they do not hit their budget
constraint (no borrowing of money)) (Zero-Intelligence
Producers)
Or in an informed way, in which case they select product
maximising their expected return based on



skills (i.e. costs) only
Difference between costs and latest trading price
Difference between costs and latest bid
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Agents’ choices

Sellers: have to select which product to sell among
their current stocks of products


Either randomly (they pick a random product to sell or buy)
= Zero-Intelligence Sellers
Or in an informed way, in which case they select product
maximising their expected return based on



skills (i.e. costs) only
Difference between skills and latest trading price
Difference between skills and latest bid
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Agents’ choices

Buyers:

In competitive market: select which product to place a bid for



Either randomly
Or in an informed way, based on different information sets
In random market: accept or reject the proposed offer based on
their budget constraint and utility
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Agents’ choices

Buyers and sellers are both constrained

Sellers



Only put offers for products they have in stock
Never sell at a loss (i.e. minimum selling price = production cost)
Buyers


Never place offers beyond their budget constraint
Never put bids at a price higher then their taste (utility)
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Competitive: double auction

Market picks a random buyer and a random seller






Selected seller selects a product and places a lower ask than the best
selling offer so far for the same product (bottom limit = skill)
Selected buyer selects a product and places a higher bid than the best
buying offer so far for the same product (upper limit = taste)
Both selections can be done in various ways
As soon as two offers cross each other for the same product,
a transaction is performed and the tick is completed
If no offers cross, the market picks another pair of seller and
buyer to place new offers
If after a predetermined number of trials (arbitrarily high), no
transaction can occur, the execution of the model stops and a
market failure is reported
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Random

Market picks a seller and a buyer at random


If tastes of selected buyer exceed selected seller’s production
cost and if buyer is sufficiently endowed, the transaction is
performed



Selected seller picks a certain product for sale (in an informed or
random way)
The price is set by the market at random between the seller’s production
costs and the buyer’s utility
If the selected buyer is not sufficiently endowed or if its tastes
are below the production costs, the market picks another
random pair of buyer and seller
If following a predetermined number of trials, no transaction
can occur, a market failure is reported.
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Key metrics




Money and utility
Total wealth defined here as the sum of money and
utility
The method used here to measure the inequality is
the traditional Gini coefficient
It varies between 0 and 1,
with 0 0
0 meaning perfect equality
and 1 meaning perfectly
inequality. So the closer to 1
the more unequal the market is.
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Preliminary results:
50 agents and 10 products
Random skills and tastes
Same initial settings between
random and competitive
19
Average scores at the end of 50000 ticks across
200 simulations with random production
Total Utility
Initial Endowment
Total Money
Total Money Spent
Total Wealth
RANDOM PRODUCTION
Random Competitive % Difference
7092
9927
40%
25000
25000
20758
20772
0%
4242
4228
0%
27849
30698
10%
Gini Utility
0,13
0,41
212%
Gini Money
0,04
0,15
279%
0,01
50000
200
24%
0,03
50000
200
23%
243%
Gini Wealth
Ticks per run
Runs
Failure rate
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Evolution of the Gini index
Average scores at the end of 50000 ticks across
200 simulations with informed production
Total Utility
Initial Endowment
Total Money
Total Money Spent
Total Wealth
INFORMED PRODUCTION
Random Competitive % Difference
5857
9433
61%
25000
25000
23264
23242
0%
1736
1758
1%
29122
32675
12%
Gini Utility
0,07
0,39
484%
Gini Money
0,01
0,10
638%
0,01
50000
200
0%
0,05
50000
200
0%
437%
Gini Wealth
Ticks per run
Runs
Failure rate
22
Average scores at the end of 50000 ticks across
200 simulations with informed production
DIFFERENTIAL PERFORMANCE OF MODELS
(COMPETITIVE / RANDOM)
Production
Random
Informed
Difference
Total Utility
40%
61%
53%
Total Wealth
10%
12%
19%
Gini Utility
212%
484%
128%
Gini Money
279%
638%
129%
Gini Wealth
243%
437%
80%
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Observations

While it creates more welfare (utility and money) at the
aggregate level, the competitive market distributes it much
less equally



Behavior of agents (here the information used by the
producers) makes differences even worse:



Gain in welfare much smaller in proportional terms than loss in equality
Inequalities keep growing in competitive market but stabilize in random
Welfare differential increases slightly
Inequality differential is doubled
Robust to a number of changes in initial conditions:

Initial endowment and production, Number of agents (2-100), Number of
products (1-14), Product selection choices, etc.
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Limitations (and ongoing work)

Our measure of social welfare and distribution



Sum of money and utility is rough, additive consumed utility as well
Allow for satiation in the model
Exploring other sets of information flows in both market
structures than can lead to a better trade-off between
equality and efficiency
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Conclusions

Competition as a paradigm can be challenged



Agent behavior may not affect efficiency in competitive
markets, but it can make the market more unequal,
hence a political question: should we promote market
structures that refrain certain behaviors, e.g. by
introducing some randomness in competitive
institutions?


Gain in efficiency does not seem to compare with loss in equality
Redistribution mechanisms are not perfect (or satisfactory)
E.g.: Semi-random auctions?
Equality v. efficiency  THE KEY ETHICAL DEBATE
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Why should the economy be competitive?
This is still work in progress…
Comments, suggestions and
questions most welcome!
bersini@ulb.ac.be
nivzeebr@ulb.ac.be
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