Abstract
PurposeSimulating markets using agent-based models must consider pricing. However, the strategic nature of prices limits the development of agent-based models with endogenous price competition.MethodsI propose an agent-based algorithm based on Game Theory that allows us to simulate the pricing in different markets. I test the algorithm in five theoretical economic models from the industrial organization literature.ResultsIn all cases, the algorithm is capable of simulating the optimal pricing of those markets. It is also tested in two more cases: one in which the original work fails to predict the optimal outcome, and another one that is quite complex to solve analytically. Lastly, I present two potential extensions of this algorithm: one dynamic, and another one based on quantity competition.ConclusionsThis algorithm opens the door to the extensive inclusion of pricing in agent-based models, but also, it helps to establish a link between the industrial organization literature and the agent-based modeling.
Highlights
IntroductionThere is a lack of integration between this approach and the industrial organization literature
Prices play an essential role in any market and understanding how they are fixed is a fundamental part of the Economic Science
We test the algorithm in five different theoretical models, and we prove that the algorithm reproduces the Nash equilibria of those models
Summary
There is a lack of integration between this approach and the industrial organization literature This lack of integration is clearly depicted by the Sanchez‐Cartas Complex Adapt Syst Model (2018) 6:2 absence of works that address prices in agent-based models (ABM), despite being considered an essential variable in markets.. This lack of integration is clearly depicted by the Sanchez‐Cartas Complex Adapt Syst Model (2018) 6:2 absence of works that address prices in agent-based models (ABM), despite being considered an essential variable in markets.1 To address this issue, I propose an algorithm for agent-based models that simulates price competition among companies. This algorithm establishes a new link between the industrial organization literature and the agent-based modeling It is based on Game Theory, and it guarantees the optimality of consumers’ and companies’ behavior without needing to use the equilibrium equations of any theoretical model, nor relying on maximizing (minimizing) any real function..
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