Why should the economy be competitive ?

1. Why should the economy be competitive ? Hugues Bersini (ULB, IRIDIA) Nicolas van Zeebroeck (ULB, SBS-EM, ECARES)

2. Whyshouldwebecompetitive ? • A ethically grounded endeavor to demystify competition • Competition is generally defended on rational basis in biology

3. Whyiseconomycompetitive ? • One often tends to seemanyvirtues in competition • As economists, we tend to love competitionbecauseitisknown to lead to efficiency or optimal allocation, i.e. to the most productive use and allocation of resources possible • But competitionalso leads to largerinequalities • Therefore as economistswe tend to advocatethata soundeconomicpolicyshouldaim • Atmaximising social welfare, • Atredistributing to reduce the inequalitiesresultingfromcompetition

4. Whyiseconomycompetitive ? • Somethingsthatwe know: • Competitivemarkets lead to optimal efficiency (seee.g. Gode and Sunder 1993) • They do soevenwhen agents are zero-intelligent, so long as they face a budget constraint (Gode and Sunder 1993) • There is a trade-off betweenefficiency and equality, whichcreates a need for redistribution mechanisms (e.g. Sen 1973; Okun 1975) • Thingsthatwe know relativelyless about: • Whatfeatures of competitivemarkets trigger or fosterinequalitiesamong agents? • And how does the behavior of agents affect inequality? • By giving up competitivemarket structures, would the loss in efficiencybeproportional to the gain in equality? • Can we come up with a market structure thatwouldmaximizeequalitywithoutdepartingtoomuchfromefficiency, and whatwouldbe the role of information in such setting? • And the bigunderlying (philosophical/political) question: • Whatshouldweaim to maximize for the higher good of society?

5. Our experiment • A generalobject-oriented agent-based model thatcanbeeasilyadapted to test and compare the emergingproperties of differentmarket structures and different agent behaviors • Whatwemeasure: • Social welfare, defined as the sum of money and utility accumulatedacrossagents • Welfare distribution, defined as the Gini index of money, or utility, or both • How weproceed: • Create pairs of ‘worlds’ • Competitivemarket = double auctionmarket • Randommarket = randommatchingmechanismbounded by budget constraint, skills (costs) and tastes (utility) • Run simulation over thousands of tickswithrandomskills & tastes distributions • Alwaysrun in parallel the 2 worldswith the exact same initial conditions and agents • Pairwisecomparisons of welfare and distribution at the end of each simulation betweenworlds • Test robustess of results to varying initial parameters and specifications over hundreds of simulations

6. How wedepartfrom the literature? • Within-marketstudies v. our comparative studyacrossdifferentmarket structures • Focus on inequality, not justefficiency • Look at impact of agents’ rationality (i.e. which information do they use in theirchoices) on inequality • Agent’sresponsibility in the inequalitieswe observe?

7. Our main observations • Whatever the initial conditions and agent behaviors: • Competitivemarketcreatessuperiorwelfare (not surprisingly) in the order of 50% more welfarethanrandommarket • Competitivemarketcreatesconsiderably more inequalities, in the order of 200 to 400% more inequalitiesthanrandommarket • The rationality and behavior of agents does not affect efficiencytoomuch (consistentlywith Gode and Sunder 1993), but theycan impact inequalitiesverysignificantly

8. Our stylizedmarketmodels

9. UML Class Diagram 0…*

10. Products and agents • Agents have tastes for eachproduct in the productspace, whichdetermine the amount of utility theyenjoyfromconsuming one unit of the product • The sum of tastes acrossproductsis 1 for each agent • Agents have skills in producingeachproduct, whichdetermine the coststheyincur to produce one unit of the product • The sum of skillsacrossproductsis 1 for each agent • Skills and tastes are distributedrandomlyat the beginning of each simulation • Agents are alwaysidentical in the twomarketscreated in a simulation

11. At each tick

12. Agents’ choices • Producers: have to select whichproduct to make • Eitherrandomly (theypick a randomproduct to produce and produceitso long as they do not hit their budget constraint (no borrowingof money)) (Zero-Intelligence Producers) • Or in an informedway, in which case they select productmaximisingtheirexpected return based on • skills (i.e. costs) only • Differencebetweencosts and latesttradingprice • Differencebetweencosts and latestbid

13. Agents’ choices • Sellers: have to select whichproduct to sellamongtheircurrent stocks of products • Eitherrandomly (theypick a randomproduct to sell or buy) = Zero-Intelligence Sellers • Or in an informedway, in which case they select productmaximisingtheirexpected return based on • skills (i.e. costs) only • Differencebetweenskills and latesttradingprice • Differencebetweenskills and latestbid

14. Agents’ choices • Buyers: • In competitivemarket: select whichproduct to place a bid for • Eitherrandomly • Or in an informedway, based on different information sets • In randommarket: accept or reject the proposedofferbased on their budget constraint and utility

15. Agents’ choices • Buyers and sellers are bothconstrained • Sellers • Only put offers for productsthey have in stock • Never sellat a loss (i.e. minimum sellingprice = production cost) • Buyers • Never place offersbeyondtheir budget constraint • Never put bidsat a pricehigherthentheir taste (utility)

16. Competitive: double auction • Marketpicks a randombuyer and a random seller • Selected seller selects a product and places a loweraskthanthe best sellingofferso far for the sameproduct (bottomlimit = skill) • Selectedbuyer selects a product and places a higherbidthan the best buyingofferso far for the sameproduct (upperlimit = taste) • Bothselectionscanbedone in variousways • As soon as twooffers cross eachother for the sameproduct, a transaction isperformed and the tickiscompleted • 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

17. Random • Marketpicks a seller and a buyeratrandom • Selected seller picksa 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.

18. 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 marketis.

19. Preliminaryresults: 50 agents and 10 products Randomskills and tastes Same initial settings betweenrandom and competitive

20. Average scores at the end of 50000 ticksacross 200 simulations withrandom production

21. Evolution of the Gini index

22. Average scores at the end of 50000 ticksacross 200 simulations withinformed production

23. Average scores at the end of 50000 ticksacross 200 simulations withinformed production

24. 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.

25. Limitations (and ongoingwork) • 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

26. 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

27. Whyshould the economybecompetitive? This isstillwork in progress… Comments, suggestions and questions mostwelcome! bersini@ulb.ac.be nivzeebr@ulb.ac.be