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Supply and Demand from the Bottom Up aka Zero-Intelligence Traders

This experiment, based on Axtell's "The Market for Apples" and Gode and Sunder's "Zero-Intelligence Traders Experiment," explores the distribution of prices and quantity sold in a market. Using a simple agent-based model implemented in an object-oriented manner, the experiment demonstrates how price heterogeneity and the right quantity can be achieved through random matching and formation of bid and ask prices.

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Supply and Demand from the Bottom Up aka Zero-Intelligence Traders

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  1. Supply and Demandfrom theBottom UpakaZero-Intelligence Traders Rob Axtell Brookings and Santa Fe

  2. Outline • Experiment: “The Market for Apples” • From Bergstrom and Miller, Experiments with Economic Principles” • Agent-based model of your behavior • Simplest possible model • Object-oriented implementation • Gode and Sunder: “Zero-Intelligence” traders

  3. Experiment • Each of you is either a buyer or seller • Buyers: • Have internal value • Wish to acquire 1 unit • Sellers: • Have cost to cover • Wish to sell 1 unit • Market proceeds until no further trades possible

  4. Round 1 30 25 20 15 10 5 3 6 9 12 15 18

  5. Round 2 30 25 20 15 10 5 3 6 9 12 15 18

  6. Zero-Intelligence Traders • Population of agents • Random matching of buyers and sellers • If buyer.value > seller.cost then pick random price between these limits • Repeat until no more trades possible • What is the distribution of prices? • What is the quantity sold?

  7. Summary • Simple in-class experiment yields price heterogeneity, quantity about right • ‘Zero-intelligence’ trading model (random pairing, random formation of ‘bid’ and ‘ask’ prices, random exchange price) is capable of reproducing qualitiative results of the experiments • This represents a bottom-up model of supply and demand

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