9 ms·

Cartels Are an Emergent Phenomenon, Say Complexity Theorists

110 points by pg 15y ago

wisty 15y ago
A similar thing has already been shown by Steve Keen. First, he shows that if firms optimize by attempting to set the total derivative of profits to zero, they behave like monopolies. Second, he uses a simple model in which firms randomly raise or lower prices, then revert if they lost money, and shows they converge to behaving like monopolies. He also points out that many fundamental economic principles are flawed, and have been proven to be flawed for years, but economists lack rigor, and would rather live in their "supply meets demand, actors are rational, and the market is in equilibrium" fantasy-land. Oh, and in about 2006, he warned that there'd be a recession caused by a debt-deflation, just like in 1929. He warned that the government would continually underestimate its impact. He also thinks that the best way to "reset" the system is with a "modern jubilee" - the government engage in massive quantitative easing (which they won't, because they don't realise what's causing the crisis, and how bad it is), and should hand out the free money to tax-payers rather than giving it to banks, as the banks have lost their appetite for risk and won't create new money even if you feed them. But mainstream economists only study basic calculus, linear algebra, and statistics, not ODEs, and don't believe anything they don't understand. A 50 year old professor (or central banker) isn't going to go back to school and sit in a class with sophomore engineers, just to be able to understand what "complexity theorists" and "econophysists" are talking about, so they just pretend that it doesn't exist. There's no conspiracy, they just don't read or teach anything more mathematically advanced than IS-LM (which is stone age). Their journals don't accept non-mainstream papers for "methodological reasons" (they don't understand basic differential equations), or because it "doesn't sit well with the current theory" (it proves them wrong) and since there's tens of thousands of them they tend to dominate the field.
- pash 15y ago
  > ... but economists lack rigor, and would rather live in their "supply meets demand, actors are rational, and the market is in equilibrium" fantasy-land. No, that's not why economics is in the state it's in. The reason economics is full of theorems that only hold in highly stylized worlds is that economics is hard. Betrand Roehner provides an insightful classification of problems in the natural and social sciences by their level of complexity.[1] Two-body problems (like most of those in classical mechanics) are the least complex. N-body problems in which the interactions are local and the bodies are homogenous (like many problems in statistical mechanics) occupy the next level. At the third level of complexity are homogenous N-body problems with long-range interactions. And at the fourth level are heterogeneous N-body problems; these include lots of hard problems, like regulation of gene expression, morphogenesis ... and pretty much all interesting problems in economics and the social sciences. Yes, I just said economics is harder than physics. (Well, it's harder than the physics physicists have been able to figure out so far.) And the difficultly of the problems is compounded by the difficultly of doing experiments in economics and the social sciences; you can't measure and tinker with a self-contained version of society in a lab somewhere. Is it any surprise then that most of economics doesn't really tell us anything directly applicable to the real world? > ... mainstream economists only study basic calculus, linear algebra, and statistics, not ODEs, and don't believe anything they don't understand. A 50 year old professor (or central banker) isn't going to go back to school and sit in a class with sophomore engineers, just to be able to understand what "complexity theorists" and "econophysists" are talking about, so they just pretend that it doesn't exist. There's no conspiracy, they just don't read or teach anything more mathematically advanced than IS-LM (which is stone age). You could not be more wrong. Economists, at least those from good programs, have great quantitative training. Pick up any copy of Econometrica if you don't believe me.[2] The mathematical tools used by financial economists, in particular, are largely the same as those used by statistical physicists, which is why so many physics PhDs end up working in finance. (Brownian motion, power-law distributions, etc. were all first described in an economic context.) Informed criticisms of the profession usually comes from the other side, e.g., that top economics journals are full of mathematical fireworks and devoid of reference to the real world. And IS-LM has not been a part of mainstream macroeconomics since at least the early 1970s. It is still taught in some intro undergrad macro courses (precisely because it requires no mathematical sophistication to understand, I suppose), but it is not a part of the graduate curriculum or a part of the way macroeconomists comprehend the workings of the economy. Your citing it illustrates how little you know of what you speak.[3] 1. http://books.google.com/books?id=LEzfZ-Z98V0C&lpg=PA10&ots=jTnTLVY4sV&dq=classification%20of%20complexity%20roehner&pg=PA13#v=onepage&q&f=false http://books.google.com/books?id=LEzfZ-Z98V0C&lpg=PA10&#... 2. http://www.econometricsociety.org http://www.econometricsociety.org 3. There was recently some hullabaloo in the economics blogosphere of the place of IS-LM in economics pedagogy. See, e.g., http://marginalrevolution.com/marginalrevolution/2011/10/putting-the-is-lm-debate-in-context.html http://marginalrevolution.com/marginalrevolution/2011/10/put...
  - wisty 15y ago
    > Yes, I just said economics is harder than physics. I'm saying that too. > You could not be more wrong. Economists, at least those from good programs, have great quantitative training. Which programs? Is this Ivy League PhD, econometrics stream? Or undergrad? First year physics students learn special relativity. They won't learn the advanced stuff until 3rd year, or maybe 4th, but it's still taught. But most economics students struggle with "econometrics", which is glorified linear algebra. There's theoreticians who do understand complexity, but none of their work is likely to be widely read. There'll be a few ivory tower academics doing really hard stuff, but it doesn't enter the general body of knowledge. It's like saying that computer programmers don't understand algorithms. Of course some do, and there's research out there if you want to find it, but generally just they kind of know that O(n) is good, and O(2^n) is bad. And while economists are pretty good at statistics (at least, the good ones are), very few use differential equations. It's not covered in undergraduate classes, and by postgrad classes it's too late. And while IS-LM is going out of fashion, it's just being replaced with DSGE. I can't see any appendix on differential equations in the TOC of that textbook you mention, is that because everyone already understands them, or because despite the model being called "Dynamic", it's not? I quote Solow, the guy who kind of invented it: http://econlog.econlib.org/archives/2010/07/robert_solow_on_1.html http://econlog.econlib.org/archives/2010/07/robert_solow_on_... > I do not think that the currently popular DSGE models pass the smell test. They take it for granted that the whole economy can be thought about as if it were a single, consistent person or dynasty carrying out a rationally designed, long-term plan, occasionally disturbed by unexpected shocks, but adapting to them in a rational, consistent way. I do not think that this picture passes the smell test. The protagonists of this idea make a claim to respectability by asserting that it is founded on what we know about microeconomic behavior, but I think that this claim is generally phony. The advocates no doubt believe what they say, but they seem to have stopped sniffing or to have lost their sense of smell altogether. Yes, economics is hard. Yes, there's smart people working on it. But by the time it filters down to teaching undergraduates or setting policy, the general attitude is "we'll assume rational behavior and a market at equilibrium, so nothing we say is going to be too controversial". (trollish rant ahead) I wonder what to ration of neo-classicals to quants is on Wall Street (where people actually have to make the right calls) compared to the Federal Reserve and the Treasury? It's basic agency theory - the economists who can't handle complexity take over dumb institutions (like most universities and governments), then insulate themselves against having to learn anything they aren't comfortable with.
- bootload 15y ago
  "... There's no conspiracy, they just don't read or teach anything more mathematically advanced than IS-LM ..." I aked Steve about this exact problem, [0] the mismatch of decision making using at best questionable economic modelling and the reply was along the lines you suggest. It starts right at University level theory where nobody questions the accepted orthodox theory. What I don't understand is why more mathematicians don't call mainstream economists bluff? [0] "Why I went" http://www.flickr.com/photos/bootload/5518902314/in/set-72157623796441755 http://www.flickr.com/photos/bootload/5518902314/in/set-7215... [1] http://www.flickr.com/photos/bootload/collections/72157623796440209/ http://www.flickr.com/photos/bootload/collections/7215762379...
  - wisty 15y ago
    As I've said on another thread: It's basic agency theory - the economists who can't handle complexity take over dumb institutions (like most universities and governments), then insulate themselves against having to learn anything they aren't comfortable with. I guess the smarter ones work for Goldman Sachs, or work in university research departments, writing obscure papers that are never going to be compulsory reading because undergrad economics courses don't require hard-core math.
scotty79 15y ago
I think you just should make sure that the consumer is aware of the prices set up by different sellers. I'd make a rule that if you want to sell anything and you have list of current prices in any electronic format you have to publish it online in machine readable format before you are allowed to sell single item of your stock. Other necessary rule is to establish that for store to be allowed to sell anything it must allow all customers use their cellphones in any way they see fit.
chrismealy 15y ago
Cool result. Another reminder that just because something is self-organizing that doesn't make it benevolent.
funthree 15y ago
This means that capitalism, at its core, is somewhat flawed. Surprisingly and scarily in tune with Zeitgeist Moving Forward [1] 1. http://www.youtube.com/watch?v=QYLLFpNn4lM http://www.youtube.com/watch?v=QYLLFpNn4lM
- rcthompson 15y ago
  I don't think that conclusion is justified, at least not directly. A more conservative conclusion might be "capitalism requires buyer flexibility in order to function correctly" (where "correctly" means that prices accurately track the intrinsic value of the goods being sold).
  - funthree 15y ago
    The article clearly describes a study performed in diligence (from the looks of it) which reveals a perhaps serious flaw that permeates (or can permeate) in all markets. The conclusion being that cartels emerge as a product of the system, not as a product of immorality or deceit. I guess I understand why people would not want to see it put so bluntly (capitalism is flawed. full stop.) but even you in so many words said the same thing. It is in part inherently corrupt and the silent hand of the market is sometimes a sinister one.
    - dingfeng_quek 15y ago
      The paper is a study of a particular mathematical model and simulation. The suggested association of the mathematical model to the model of markets (with many suppliers) where the buyer has a "slow reaction time" results in a price that would, in some sense, be analogous to the price generated by cartels. The implication is likely that such a market doesn't reach the perfectly competitive price, which is what a simpler model that doesn't consider the buyer's reaction time would predict. Neither the article nor the paper claims that this emergent phenomenon occurs (can occur) in all, or even the majority of, markets. Quote: "Under certain market conditions, cartels arise naturally without collusion. This raises important questions over how the behavior should be controlled" Neither the article nor the paper claims that cartels always "emerge" as "a product of the system". No systems were mentioned, and no definition of product was given. Neither the article nor the paper claims that cartels do not emerge "as a product of immorality or deceit". It seems plausible that people might not enjoy a misrepresentation of the authors, who did put in effort (authoring such a paper is never done in a night).
rcthompson 15y ago
I think the important point of the article is that when buyers are unable to react as fast as sellers to changes in the market, the market is ripe for what I'm going to dub "auto-cartelization". Taking this a bit further, the best way to fight this phenomenon may be to improve buyers' ability to react quickly to the market. I'm sure there's some startup ideas here for specific instances of "market".
- borism 15y ago
  I think first thing first - buyers need to realize that in most instances they ARE the market.
- MCompeau 15y ago
  I wonder if this work has an implication in markets where the buyer is unable to react quickly to price fluctuations. For instance markets where the buyer is tied to monthly fees and contracts like in the telecomm industry is the cartel effectively institutionalized?
  - yummyfajitas 15y ago
    No, because in those cases, the seller is also unable to adjust the price. The model might apply, but only very slowly. A single tick of the model would be equal to the duration of a contract (i.e., instead of updating prices multiple times per day, as the authors propose, prices would be updated every 1-2 years).
    - Retric 15y ago
      Only individuals are stuck with 24 month contracts. AT&T and Verizon can change their prices for new contracts / renewals without any problem so they can use daily ticks. Even though they keep their customers long term.
      - rcthompson 15y ago
        It doesn't matter. They can't change the price on existing contracts, and when those contracts are up, customers have the option of picking a new seller.
ScottBurson 15y ago
If cartel-like behaviour is an emergent property of an ordinary market, how should it be controlled, regulated and punished? Why punish it? By this reasoning, all you need to do is to give buyers better information so they can react faster. The problem with gas prices, I suppose, is that you have to drive around to collect them, and once you come to a station, if you decide its price is unacceptable there's a cost to checking out the next one (the time it takes you to drive there). Seems like there could be a mobile app that tells drivers the gas prices at stations in their vicinity, which, according to the article, should change the system's behavior mode to push prices down instead of up.
- wisty 15y ago
  In some cases, could nationalization be cheaper?
- rcthompson 15y ago
  Better information does not necessarily allow faster reaction. It could lead to information overload. In general, I think the problem of how to improve buyer reaction times in a market is going to be a lot harder than "give them more/better information" (although simply providing more/better information may indeed be the solution for some markets). Also, that mobile app (or several) exists. But they rely on users reporting the data, so there are significant network effects -- the more people use it, the more timely and useful the data becomes.
  - Hemospectrum 15y ago
    More information is not necessarily better information.
- tikhonj 15y ago
  Why punish it? Well, I imagine the logic is simple: a cartel--even if it is not the result of collusion--undermines the market (to some extent). Therefore, it is in the interest of a fair market to disincentivize it in some way. It doesn't have to be punishment per se, but some way of trying to limit cartels would be good.
bravura 15y ago
The results make interesting reading. It turns out that a crucial factor is the speed at which buyers and sellers react to the market. When buyers react quickest, sellers are forced to match the best possible value for money and prices tend to drop. By contrast, when sellers react quickest, they are quick to copy others offering poor value for money. This reduces the number of sellers offering good value for money in a vicious cycle that drives prices as high as possible. Does this model match practice? i.e. If we consider all industries in which there are price cartels, particularly those that were formed without price collusion, could the existence of those cartels be attributed to sellers reacting faster than buyers? Also, are we confident of the converse? That there an no examples of non-collusive cartels in markets where buyers react faster than sellers? This seems plausible to.
Sniffnoy 15y ago
"Complexity theorists"?
- rcthompson 15y ago
  Are you asking what a complexity theorist is, or are you asking why the title uses the term despite the fact that the article text introduces the researchers as physicists?
  - Sniffnoy 15y ago
    I was asking why they're using that term despite this having nothing to do with computational complexity. Looking it up this is apparently also a recognized use of the term and so my question was a bit dumb.
    - _delirium 15y ago
      It's basically an umbrella term for studying systems that are complex in the sense that they have strange nonlinear effects and may not be "well-behaved" in the way that classical, mathematically well-understood systems are. A large portion of it grew out of chaos theory, though some has gone in other directions since then.
      - lnguyen 15y ago
        Physics PhD who did his research in complex systems (how sand supports weight)... Usually these complex systems consist of parts where the individual interactions are thought to be well understood but the aggregate behavior is not (aka non-linear). In the case of sand, you can pretty much model the forces acting on a single grain/particle using intro physics but you wouldn't expect the long-range force chains you see in static piles or avalanches when more sand is added.
brador 15y ago
Any evolutionary system without appropriate mutation leads to a "monopoly" for the dominant. Capitalism is no different. Our best bet solution is currently regulation. Not great, but it works.
- VMG 15y ago
  > Any evolutionary system without appropriate mutation leads to a "monopoly" for the dominant. That sentence doesn't make any sense to me. There is no evolution without mutation. Our best bet solution is currently regulation. Not great, but it works. Some have very good arguments that it doesn't work, since the regulators are a lever that is most easily pushed by the powerful: http://en.wikipedia.org/wiki/Regulatory_capture http://en.wikipedia.org/wiki/Regulatory_capture Also "monopolies" don't always have to be in the disinterest of the consumer. If there really is a single company that produces the best product, why punish it? The definition of "product" alone is difficult enough - does Apple have a monopoly on computers? on iPads?
rcthompson 15y ago
An interesting related question might be: what happens when a subset of buyers can react quickly, but the rest react slowly? And ditto for a subset of sellers.
- dingfeng_quek 15y ago
  The fast ones become rich. They perform trades equivalent to front-running and/or scalping. The enterprising fast becomes a middleman to the slow.
- andrewcooke 15y ago
  the slow ones go out of business.
pash 15y ago
Though a fun paper, Technology Review's write-up of it is worthless. At most, all you should take from reading this paper is that "cartels" potentially can emerge without coordination, not that they do or that they are likely to. Or that this phenomenon has anything at all to do with the dynamics of prices at your neighborhood gas-station. As anyone who has studied complex systems understands, the evolution of interactions among even very simple agents is enormously sensitive to initial conditions. (That's often taken as the very definition of chaos in deterministic systems.) So it is almost always wrong to draw strong conclusions about a complex part of the real world based on your computational model of it: vary one parameter a little bit and you end up with something that looks completely different. This is why agent-based models, like the one employed in this study, are widely despised in economics and the other social sciences despite offering a way to do experiments that would otherwise be impossible in these fields. We simply don't know enough about people and how they interact to build meaningful models, and we probably never will. For example, an economist might point out that the model presented in this paper doesn't account for the spacial distribution of gas stations and consumers, for buyers' and sellers' expectations of future prices, or for any number of conceivable and inconceivable factors—almost all of which would affect aggregate outcomes in the model, I would bet, just as the authors found that the speed of reacting to price-changes did. (That was the only parameter the authors varied, by the way.) And of course we could model the problem in many fundamentally different ways to start with. In other words, this is much different (and harder) than building an N-body model of the dynamics of Alpha Centauri, where's there's basically one force (gravity) that operates in the same way on a bunch of things that can all be described adequately by a single parameter (mass).
- eternalban 15y ago
  I agree with your general critique, but these guys have a structural problem in their model: Their description of their model[1]: Our model is defined as follows. We consider a population of N agents, where each agent has two simultaneous roles: donator (e.g. a buyer) and rewarder (e.g. a seller). This simply does not correspond to the reality: we have locally interacting agents (gas-station owner, vehicle owner) that exist in a (relatively) 'flat'/'simultaneous' information space (e.g. the news of troubles in oil region x) and the fact that one set of agents (e.g. gas-station owners) are themselves engaged in affinity based relationship[s] with global agents (e.g. oil companies). "No need for conspiracy: Self-organized cartel formation in a modified trust game" -- sure, in a purely locally bounded space of action and information. But that is not the reality of life on this planet. (Not for the past 200 years, for sure.) [1]: http://arxiv.org/pdf/1201.3798v1.pdf http://arxiv.org/pdf/1201.3798v1.pdf
nsedlet 15y ago
To bring up a potential real-world example: A friend of mine has done a lot of research on the major credit card companies for his hedge fund. He noticed that these companies tend to raise their fees basically in lock-step (when one does it, the others follow quickly). This behavior seemed counter-intuitive to me -- I would have guessed that the companies would compete to keep fees low. But this actually makes some sense in a world where the seller (the credit card company) reacts much more quickly than the buyer (the fee-paying banks and merchants). Banks and merchants can only switch credit card issuers if they can get their customers to (i.e. the card-holders). Therefore, it's possible for a card company to raise fees without losing market share right away. Other card companies take note and their dominant strategy is to raise fees as well.

110 points by pg 15y ago

wisty 15y ago

A similar thing has already been shown by Steve Keen. First, he shows that if firms optimize by attempting to set the total derivative of profits to zero, they behave like monopolies. Second, he uses a simple model in which firms randomly raise or lower prices, then revert if they lost money, and shows they converge to behaving like monopolies. He also points out that many fundamental economic principles are flawed, and have been proven to be flawed for years, but economists lack rigor, and would rather live in their "supply meets demand, actors are rational, and the market is in equilibrium" fantasy-land. Oh, and in about 2006, he warned that there'd be a recession caused by a debt-deflation, just like in 1929. He warned that the government would continually underestimate its impact. He also thinks that the best way to "reset" the system is with a "modern jubilee" - the government engage in massive quantitative easing (which they won't, because they don't realise what's causing the crisis, and how bad it is), and should hand out the free money to tax-payers rather than giving it to banks, as the banks have lost their appetite for risk and won't create new money even if you feed them. But mainstream economists only study basic calculus, linear algebra, and statistics, not ODEs, and don't believe anything they don't understand. A 50 year old professor (or central banker) isn't going to go back to school and sit in a class with sophomore engineers, just to be able to understand what "complexity theorists" and "econophysists" are talking about, so they just pretend that it doesn't exist. There's no conspiracy, they just don't read or teach anything more mathematically advanced than IS-LM (which is stone age). Their journals don't accept non-mainstream papers for "methodological reasons" (they don't understand basic differential equations), or because it "doesn't sit well with the current theory" (it proves them wrong) and since there's tens of thousands of them they tend to dominate the field.

pash 15y ago
> ... but economists lack rigor, and would rather live in their "supply meets demand, actors are rational, and the market is in equilibrium" fantasy-land. No, that's not why economics is in the state it's in. The reason economics is full of theorems that only hold in highly stylized worlds is that economics is hard. Betrand Roehner provides an insightful classification of problems in the natural and social sciences by their level of complexity.[1] Two-body problems (like most of those in classical mechanics) are the least complex. N-body problems in which the interactions are local and the bodies are homogenous (like many problems in statistical mechanics) occupy the next level. At the third level of complexity are homogenous N-body problems with long-range interactions. And at the fourth level are heterogeneous N-body problems; these include lots of hard problems, like regulation of gene expression, morphogenesis ... and pretty much all interesting problems in economics and the social sciences. Yes, I just said economics is harder than physics. (Well, it's harder than the physics physicists have been able to figure out so far.) And the difficultly of the problems is compounded by the difficultly of doing experiments in economics and the social sciences; you can't measure and tinker with a self-contained version of society in a lab somewhere. Is it any surprise then that most of economics doesn't really tell us anything directly applicable to the real world? > ... mainstream economists only study basic calculus, linear algebra, and statistics, not ODEs, and don't believe anything they don't understand. A 50 year old professor (or central banker) isn't going to go back to school and sit in a class with sophomore engineers, just to be able to understand what "complexity theorists" and "econophysists" are talking about, so they just pretend that it doesn't exist. There's no conspiracy, they just don't read or teach anything more mathematically advanced than IS-LM (which is stone age). You could not be more wrong. Economists, at least those from good programs, have great quantitative training. Pick up any copy of Econometrica if you don't believe me.[2] The mathematical tools used by financial economists, in particular, are largely the same as those used by statistical physicists, which is why so many physics PhDs end up working in finance. (Brownian motion, power-law distributions, etc. were all first described in an economic context.) Informed criticisms of the profession usually comes from the other side, e.g., that top economics journals are full of mathematical fireworks and devoid of reference to the real world. And IS-LM has not been a part of mainstream macroeconomics since at least the early 1970s. It is still taught in some intro undergrad macro courses (precisely because it requires no mathematical sophistication to understand, I suppose), but it is not a part of the graduate curriculum or a part of the way macroeconomists comprehend the workings of the economy. Your citing it illustrates how little you know of what you speak.[3] 1. http://books.google.com/books?id=LEzfZ-Z98V0C&lpg=PA10&ots=jTnTLVY4sV&dq=classification%20of%20complexity%20roehner&pg=PA13#v=onepage&q&f=false http://books.google.com/books?id=LEzfZ-Z98V0C&lpg=PA10&#... 2. http://www.econometricsociety.org http://www.econometricsociety.org 3. There was recently some hullabaloo in the economics blogosphere of the place of IS-LM in economics pedagogy. See, e.g., http://marginalrevolution.com/marginalrevolution/2011/10/putting-the-is-lm-debate-in-context.html http://marginalrevolution.com/marginalrevolution/2011/10/put...
- wisty 15y ago
  > Yes, I just said economics is harder than physics. I'm saying that too. > You could not be more wrong. Economists, at least those from good programs, have great quantitative training. Which programs? Is this Ivy League PhD, econometrics stream? Or undergrad? First year physics students learn special relativity. They won't learn the advanced stuff until 3rd year, or maybe 4th, but it's still taught. But most economics students struggle with "econometrics", which is glorified linear algebra. There's theoreticians who do understand complexity, but none of their work is likely to be widely read. There'll be a few ivory tower academics doing really hard stuff, but it doesn't enter the general body of knowledge. It's like saying that computer programmers don't understand algorithms. Of course some do, and there's research out there if you want to find it, but generally just they kind of know that O(n) is good, and O(2^n) is bad. And while economists are pretty good at statistics (at least, the good ones are), very few use differential equations. It's not covered in undergraduate classes, and by postgrad classes it's too late. And while IS-LM is going out of fashion, it's just being replaced with DSGE. I can't see any appendix on differential equations in the TOC of that textbook you mention, is that because everyone already understands them, or because despite the model being called "Dynamic", it's not? I quote Solow, the guy who kind of invented it: http://econlog.econlib.org/archives/2010/07/robert_solow_on_1.html http://econlog.econlib.org/archives/2010/07/robert_solow_on_... > I do not think that the currently popular DSGE models pass the smell test. They take it for granted that the whole economy can be thought about as if it were a single, consistent person or dynasty carrying out a rationally designed, long-term plan, occasionally disturbed by unexpected shocks, but adapting to them in a rational, consistent way. I do not think that this picture passes the smell test. The protagonists of this idea make a claim to respectability by asserting that it is founded on what we know about microeconomic behavior, but I think that this claim is generally phony. The advocates no doubt believe what they say, but they seem to have stopped sniffing or to have lost their sense of smell altogether. Yes, economics is hard. Yes, there's smart people working on it. But by the time it filters down to teaching undergraduates or setting policy, the general attitude is "we'll assume rational behavior and a market at equilibrium, so nothing we say is going to be too controversial". (trollish rant ahead) I wonder what to ration of neo-classicals to quants is on Wall Street (where people actually have to make the right calls) compared to the Federal Reserve and the Treasury? It's basic agency theory - the economists who can't handle complexity take over dumb institutions (like most universities and governments), then insulate themselves against having to learn anything they aren't comfortable with.
bootload 15y ago
"... There's no conspiracy, they just don't read or teach anything more mathematically advanced than IS-LM ..." I aked Steve about this exact problem, [0] the mismatch of decision making using at best questionable economic modelling and the reply was along the lines you suggest. It starts right at University level theory where nobody questions the accepted orthodox theory. What I don't understand is why more mathematicians don't call mainstream economists bluff? [0] "Why I went" http://www.flickr.com/photos/bootload/5518902314/in/set-72157623796441755 http://www.flickr.com/photos/bootload/5518902314/in/set-7215... [1] http://www.flickr.com/photos/bootload/collections/72157623796440209/ http://www.flickr.com/photos/bootload/collections/7215762379...
- wisty 15y ago
  As I've said on another thread: It's basic agency theory - the economists who can't handle complexity take over dumb institutions (like most universities and governments), then insulate themselves against having to learn anything they aren't comfortable with. I guess the smarter ones work for Goldman Sachs, or work in university research departments, writing obscure papers that are never going to be compulsory reading because undergrad economics courses don't require hard-core math.

scotty79 15y ago

I think you just should make sure that the consumer is aware of the prices set up by different sellers. I'd make a rule that if you want to sell anything and you have list of current prices in any electronic format you have to publish it online in machine readable format before you are allowed to sell single item of your stock. Other necessary rule is to establish that for store to be allowed to sell anything it must allow all customers use their cellphones in any way they see fit.

chrismealy 15y ago

Cool result. Another reminder that just because something is self-organizing that doesn't make it benevolent.

funthree 15y ago

This means that capitalism, at its core, is somewhat flawed. Surprisingly and scarily in tune with Zeitgeist Moving Forward [1] 1. http://www.youtube.com/watch?v=QYLLFpNn4lM http://www.youtube.com/watch?v=QYLLFpNn4lM

rcthompson 15y ago
I don't think that conclusion is justified, at least not directly. A more conservative conclusion might be "capitalism requires buyer flexibility in order to function correctly" (where "correctly" means that prices accurately track the intrinsic value of the goods being sold).
- funthree 15y ago
  The article clearly describes a study performed in diligence (from the looks of it) which reveals a perhaps serious flaw that permeates (or can permeate) in all markets. The conclusion being that cartels emerge as a product of the system, not as a product of immorality or deceit. I guess I understand why people would not want to see it put so bluntly (capitalism is flawed. full stop.) but even you in so many words said the same thing. It is in part inherently corrupt and the silent hand of the market is sometimes a sinister one.
  - dingfeng_quek 15y ago
    The paper is a study of a particular mathematical model and simulation. The suggested association of the mathematical model to the model of markets (with many suppliers) where the buyer has a "slow reaction time" results in a price that would, in some sense, be analogous to the price generated by cartels. The implication is likely that such a market doesn't reach the perfectly competitive price, which is what a simpler model that doesn't consider the buyer's reaction time would predict. Neither the article nor the paper claims that this emergent phenomenon occurs (can occur) in all, or even the majority of, markets. Quote: "Under certain market conditions, cartels arise naturally without collusion. This raises important questions over how the behavior should be controlled" Neither the article nor the paper claims that cartels always "emerge" as "a product of the system". No systems were mentioned, and no definition of product was given. Neither the article nor the paper claims that cartels do not emerge "as a product of immorality or deceit". It seems plausible that people might not enjoy a misrepresentation of the authors, who did put in effort (authoring such a paper is never done in a night).

rcthompson 15y ago

I think the important point of the article is that when buyers are unable to react as fast as sellers to changes in the market, the market is ripe for what I'm going to dub "auto-cartelization". Taking this a bit further, the best way to fight this phenomenon may be to improve buyers' ability to react quickly to the market. I'm sure there's some startup ideas here for specific instances of "market".

borism 15y ago
I think first thing first - buyers need to realize that in most instances they ARE the market.
MCompeau 15y ago
I wonder if this work has an implication in markets where the buyer is unable to react quickly to price fluctuations. For instance markets where the buyer is tied to monthly fees and contracts like in the telecomm industry is the cartel effectively institutionalized?
- yummyfajitas 15y ago
  No, because in those cases, the seller is also unable to adjust the price. The model might apply, but only very slowly. A single tick of the model would be equal to the duration of a contract (i.e., instead of updating prices multiple times per day, as the authors propose, prices would be updated every 1-2 years).
  - Retric 15y ago
    Only individuals are stuck with 24 month contracts. AT&T and Verizon can change their prices for new contracts / renewals without any problem so they can use daily ticks. Even though they keep their customers long term.
    - rcthompson 15y ago
      It doesn't matter. They can't change the price on existing contracts, and when those contracts are up, customers have the option of picking a new seller.

ScottBurson 15y ago

If cartel-like behaviour is an emergent property of an ordinary market, how should it be controlled, regulated and punished? Why punish it? By this reasoning, all you need to do is to give buyers better information so they can react faster. The problem with gas prices, I suppose, is that you have to drive around to collect them, and once you come to a station, if you decide its price is unacceptable there's a cost to checking out the next one (the time it takes you to drive there). Seems like there could be a mobile app that tells drivers the gas prices at stations in their vicinity, which, according to the article, should change the system's behavior mode to push prices down instead of up.

wisty 15y ago
In some cases, could nationalization be cheaper?
rcthompson 15y ago
Better information does not necessarily allow faster reaction. It could lead to information overload. In general, I think the problem of how to improve buyer reaction times in a market is going to be a lot harder than "give them more/better information" (although simply providing more/better information may indeed be the solution for some markets). Also, that mobile app (or several) exists. But they rely on users reporting the data, so there are significant network effects -- the more people use it, the more timely and useful the data becomes.
- Hemospectrum 15y ago
  More information is not necessarily better information.
tikhonj 15y ago
Why punish it? Well, I imagine the logic is simple: a cartel--even if it is not the result of collusion--undermines the market (to some extent). Therefore, it is in the interest of a fair market to disincentivize it in some way. It doesn't have to be punishment per se, but some way of trying to limit cartels would be good.

bravura 15y ago

The results make interesting reading. It turns out that a crucial factor is the speed at which buyers and sellers react to the market. When buyers react quickest, sellers are forced to match the best possible value for money and prices tend to drop. By contrast, when sellers react quickest, they are quick to copy others offering poor value for money. This reduces the number of sellers offering good value for money in a vicious cycle that drives prices as high as possible. Does this model match practice? i.e. If we consider all industries in which there are price cartels, particularly those that were formed without price collusion, could the existence of those cartels be attributed to sellers reacting faster than buyers? Also, are we confident of the converse? That there an no examples of non-collusive cartels in markets where buyers react faster than sellers? This seems plausible to.

Sniffnoy 15y ago

"Complexity theorists"?

rcthompson 15y ago
Are you asking what a complexity theorist is, or are you asking why the title uses the term despite the fact that the article text introduces the researchers as physicists?
- Sniffnoy 15y ago
  I was asking why they're using that term despite this having nothing to do with computational complexity. Looking it up this is apparently also a recognized use of the term and so my question was a bit dumb.
  - _delirium 15y ago
    It's basically an umbrella term for studying systems that are complex in the sense that they have strange nonlinear effects and may not be "well-behaved" in the way that classical, mathematically well-understood systems are. A large portion of it grew out of chaos theory, though some has gone in other directions since then.
    - lnguyen 15y ago
      Physics PhD who did his research in complex systems (how sand supports weight)... Usually these complex systems consist of parts where the individual interactions are thought to be well understood but the aggregate behavior is not (aka non-linear). In the case of sand, you can pretty much model the forces acting on a single grain/particle using intro physics but you wouldn't expect the long-range force chains you see in static piles or avalanches when more sand is added.

brador 15y ago

Any evolutionary system without appropriate mutation leads to a "monopoly" for the dominant. Capitalism is no different. Our best bet solution is currently regulation. Not great, but it works.

VMG 15y ago
> Any evolutionary system without appropriate mutation leads to a "monopoly" for the dominant. That sentence doesn't make any sense to me. There is no evolution without mutation. Our best bet solution is currently regulation. Not great, but it works. Some have very good arguments that it doesn't work, since the regulators are a lever that is most easily pushed by the powerful: http://en.wikipedia.org/wiki/Regulatory_capture http://en.wikipedia.org/wiki/Regulatory_capture Also "monopolies" don't always have to be in the disinterest of the consumer. If there really is a single company that produces the best product, why punish it? The definition of "product" alone is difficult enough - does Apple have a monopoly on computers? on iPads?

rcthompson 15y ago

An interesting related question might be: what happens when a subset of buyers can react quickly, but the rest react slowly? And ditto for a subset of sellers.

dingfeng_quek 15y ago
The fast ones become rich. They perform trades equivalent to front-running and/or scalping. The enterprising fast becomes a middleman to the slow.
andrewcooke 15y ago
the slow ones go out of business.

pash 15y ago

Though a fun paper, Technology Review's write-up of it is worthless. At most, all you should take from reading this paper is that "cartels" potentially can emerge without coordination, not that they do or that they are likely to. Or that this phenomenon has anything at all to do with the dynamics of prices at your neighborhood gas-station. As anyone who has studied complex systems understands, the evolution of interactions among even very simple agents is enormously sensitive to initial conditions. (That's often taken as the very definition of chaos in deterministic systems.) So it is almost always wrong to draw strong conclusions about a complex part of the real world based on your computational model of it: vary one parameter a little bit and you end up with something that looks completely different. This is why agent-based models, like the one employed in this study, are widely despised in economics and the other social sciences despite offering a way to do experiments that would otherwise be impossible in these fields. We simply don't know enough about people and how they interact to build meaningful models, and we probably never will. For example, an economist might point out that the model presented in this paper doesn't account for the spacial distribution of gas stations and consumers, for buyers' and sellers' expectations of future prices, or for any number of conceivable and inconceivable factors—almost all of which would affect aggregate outcomes in the model, I would bet, just as the authors found that the speed of reacting to price-changes did. (That was the only parameter the authors varied, by the way.) And of course we could model the problem in many fundamentally different ways to start with. In other words, this is much different (and harder) than building an N-body model of the dynamics of Alpha Centauri, where's there's basically one force (gravity) that operates in the same way on a bunch of things that can all be described adequately by a single parameter (mass).

eternalban 15y ago
I agree with your general critique, but these guys have a structural problem in their model: Their description of their model[1]: Our model is defined as follows. We consider a population of N agents, where each agent has two simultaneous roles: donator (e.g. a buyer) and rewarder (e.g. a seller). This simply does not correspond to the reality: we have locally interacting agents (gas-station owner, vehicle owner) that exist in a (relatively) 'flat'/'simultaneous' information space (e.g. the news of troubles in oil region x) and the fact that one set of agents (e.g. gas-station owners) are themselves engaged in affinity based relationship[s] with global agents (e.g. oil companies). "No need for conspiracy: Self-organized cartel formation in a modified trust game" -- sure, in a purely locally bounded space of action and information. But that is not the reality of life on this planet. (Not for the past 200 years, for sure.) [1]: http://arxiv.org/pdf/1201.3798v1.pdf http://arxiv.org/pdf/1201.3798v1.pdf

nsedlet 15y ago

To bring up a potential real-world example: A friend of mine has done a lot of research on the major credit card companies for his hedge fund. He noticed that these companies tend to raise their fees basically in lock-step (when one does it, the others follow quickly). This behavior seemed counter-intuitive to me -- I would have guessed that the companies would compete to keep fees low. But this actually makes some sense in a world where the seller (the credit card company) reacts much more quickly than the buyer (the fee-paying banks and merchants). Banks and merchants can only switch credit card issuers if they can get their customers to (i.e. the card-holders). Therefore, it's possible for a card company to raise fees without losing market share right away. Other card companies take note and their dominant strategy is to raise fees as well.