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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
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Page 1: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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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

Page 2: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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Why should we be competitive ?

A ethically grounded endeavor to demystify competition

Competition is generally defended on rational basis in biology

Page 3: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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Why is economy competitive ?

One often tends to see many virtues in competition

As economists, we tend to love competitionbecause 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) At maximising social welfare,

(2) At redistributing to reduce the inequalities resulting from competition

Page 4: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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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?

Page 5: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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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

Page 6: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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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?

Page 7: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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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

Page 8: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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Our stylized market models

Page 9: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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UML Class Diagram

0…*

Page 10: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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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 The sum of tastes across products is 1 for each agent

Agents have skills in producing each product, which determine the costs they incur to produce one unit of the product 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

Page 11: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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At each tick

Production

Allocation(Transaction Selection)

Money and product transfer

Consumption

Page 12: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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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

Page 13: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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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

Page 14: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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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

Page 15: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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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)

Page 16: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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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

Page 17: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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Random

Market picks a seller and a buyer at random Selected seller picks a certain product for sale (in an informed or

random way) If tastes of selected buyer exceed selected seller’s production

cost and if buyer is sufficiently endowed, the transaction is performed 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.

Page 18: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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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.

Page 19: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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50 agents and 10 products

Random skills and tastes

Same initial settings between random and competitive

Preliminary results:

Page 20: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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Average scores at the end of 50000 ticks across 200 simulations with random production

RANDOM PRODUCTION  Random Competitive % Difference

Total Utility 7092 9927 40%Initial Endowment 25000 25000Total Money 20758 20772 0%Total Money Spent 4242 4228 0%Total Wealth 27849 30698 10%

Gini Utility 0,13 0,41 212%

Gini Money 0,04 0,15 279%

Gini Wealth 0,01 0,03 243%Ticks per run 50000 50000Runs 200 200Failure rate 24% 23%

Page 21: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

Evolution of the Gini index

Page 22: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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Average scores at the end of 50000 ticks across 200 simulations with informed production

INFORMED PRODUCTION  Random Competitive % Difference

Total Utility 5857 9433 61%Initial Endowment 25000 25000Total Money 23264 23242 0%Total Money Spent 1736 1758 1%Total Wealth 29122 32675 12%

Gini Utility 0,07 0,39 484%

Gini Money 0,01 0,10 638%

Gini Wealth 0,01 0,05 437%Ticks per run 50000 50000Runs 200 200Failure rate 0% 0%

Page 23: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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Average scores at the end of 50000 ticks across 200 simulations with informed production

DIFFERENTIAL PERFORMANCE OF MODELS(COMPETITIVE / RANDOM)

Production  Random Informed DifferenceTotal Utility 40% 61% 53%Total Wealth 10% 12% 19%Gini Utility 212% 484% 128%Gini Money 279% 638% 129%Gini Wealth 243% 437% 80%

Page 24: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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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 Gain in welfare much smaller in proportional terms than loss in equality Inequalities keep growing in competitive market but stabilize in random

Behavior of agents (here the information used by the producers) makes differences even worse: 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.

Page 25: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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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

Page 26: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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Conclusions Competition as a paradigm can be challenged

Gain in efficiency does not seem to compare with loss in equality Redistribution mechanisms are not perfect (or satisfactory)

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? E.g.: Semi-random auctions?

Equality v. efficiency THE KEY ETHICAL DEBATE

Page 27: Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES) Artificial Economics 2011 The Hague, Sept.

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This is still work in progress…

Comments, suggestions and questions most welcome!

[email protected]

[email protected]

Why should the economy be competitive?


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