4 ms·

Without communication between the competitors, why wouldn't one competitor's algorithm "cheat" and slightly lower its price?

by baddox 12y ago

candu 12y ago
If all competitors "cheat", you have a race to the bottom. (This points out one way to punish defectors: respond in kind.)
asgard1024 12y ago
No. There is an excellent work by Steve Keen that shows how simple it is for non-communicating bots under perfect competition to collude: http://arxiv.org/pdf/nlin/0411006.pdf http://arxiv.org/pdf/nlin/0411006.pdf I wish that mainstream economists would accept that the collusion and not competition (aka price war) is the normal state of affairs and updated their school models accordingly.
- baddox 12y ago
  I wish I knew enough econ math to follow that. Is there an easy English explanation?
- devinhelton 12y ago
  From the paper: "In this paper, we assume the only information a firm has is its own cost function, the decision it made on the previous time step (increase or decrease production), and what impact this decision had on its profit levels." I wish that people would stop citing papers based on the abstract and complicated looking math, when the entire paper is based on a completely ridiculous assumption. That companies can collude without direct communication is not in doubt - they can just do a tit-for-tat strategy. What is in doubt is whether this is stable - new entrants can come in and use a different algorithm, play a different game. This paper does not address that issue.
  - asgard1024 12y ago
    It's actually not primarily based on complicated mathematical assumptions, but on the simulation and also empirical data about MR!=MC in the real world. That was his primary motivation to study this problem. See Steve Keen's book Debunking Economics if you want a bit more details. Even if you would have an endless stream of market entrants, you would also need some companies to exit, otherwise everybody would get smaller and smaller piece of the pie. In the real world, those who come will usually set the price just below the current market value. If you think about it, it's nothing else than the Keen's model with just companies being renamed endlessly (after they make one step). But go ahead and try to simulate it, and add more realism. I think you will find very similar result (that is, profit maximizing strategy will never be to compete on price). Except for the price wars, which (in my opinion) always happen only temporarily when the big company wants to drive smaller companies out of the market entirely to get more market share as a result (just like real wars). But you need to have inelastic demand for that, otherwise I doubt it can be considered a viable strategy.
    - devinhelton 12y ago
      I came across Keen awhile ago, and actually made my own model of the price setting algorithm in python and confirmed his results. My beef is that it is an unrealistic constraint that the same price setting algorithm will be used by all companies. And it is possible for someone to enter the market using a different algorithm. MR!=MC in the real world, but the classic micoecon explanation for this is monopolistic competition. I'm not sure why there is a need to say that all of economics is wrong. Are there commodities markets with open entry and no open collusion where MR!=MC? (Where marginal cost is defined as the cost of bringing on a new production line, not just producing one more unit). Non-commodity markets get quite complicated. Often the market bifurcates into a set of premium brands and a set of low cost brands. Premium brands often try to get a monopoly over one subset of customer, who need some special feature, or try to build their brand as something special, or otherwise differentiate. Premium brands explicitly do not compete on price. Salesmen will say stuff like, "Look I know we are pricy. If you want the el cheapo software, don't buy us. Buy us if you want the good stuff." If the market just has premium brands, that all price way above cost of production, someone is going to try to enter the market with a lower cost product. I never gathered what point Keen was trying to make, not what he was saying that was both novel and true.

Without communication between the competitors, why wouldn't one competitor's algorithm "cheat" and slightly lower its price?

by baddox 12y ago

Without communication between the competitors, why wouldn't one competitor's algorithm "cheat" and slightly lower its price?

candu 12y ago

If all competitors "cheat", you have a race to the bottom. (This points out one way to punish defectors: respond in kind.)

asgard1024 12y ago

No. There is an excellent work by Steve Keen that shows how simple it is for non-communicating bots under perfect competition to collude: http://arxiv.org/pdf/nlin/0411006.pdf http://arxiv.org/pdf/nlin/0411006.pdf I wish that mainstream economists would accept that the collusion and not competition (aka price war) is the normal state of affairs and updated their school models accordingly.

baddox 12y ago
I wish I knew enough econ math to follow that. Is there an easy English explanation?
devinhelton 12y ago
From the paper: "In this paper, we assume the only information a firm has is its own cost function, the decision it made on the previous time step (increase or decrease production), and what impact this decision had on its profit levels." I wish that people would stop citing papers based on the abstract and complicated looking math, when the entire paper is based on a completely ridiculous assumption. That companies can collude without direct communication is not in doubt - they can just do a tit-for-tat strategy. What is in doubt is whether this is stable - new entrants can come in and use a different algorithm, play a different game. This paper does not address that issue.
- asgard1024 12y ago
  It's actually not primarily based on complicated mathematical assumptions, but on the simulation and also empirical data about MR!=MC in the real world. That was his primary motivation to study this problem. See Steve Keen's book Debunking Economics if you want a bit more details. Even if you would have an endless stream of market entrants, you would also need some companies to exit, otherwise everybody would get smaller and smaller piece of the pie. In the real world, those who come will usually set the price just below the current market value. If you think about it, it's nothing else than the Keen's model with just companies being renamed endlessly (after they make one step). But go ahead and try to simulate it, and add more realism. I think you will find very similar result (that is, profit maximizing strategy will never be to compete on price). Except for the price wars, which (in my opinion) always happen only temporarily when the big company wants to drive smaller companies out of the market entirely to get more market share as a result (just like real wars). But you need to have inelastic demand for that, otherwise I doubt it can be considered a viable strategy.
  - devinhelton 12y ago
    I came across Keen awhile ago, and actually made my own model of the price setting algorithm in python and confirmed his results. My beef is that it is an unrealistic constraint that the same price setting algorithm will be used by all companies. And it is possible for someone to enter the market using a different algorithm. MR!=MC in the real world, but the classic micoecon explanation for this is monopolistic competition. I'm not sure why there is a need to say that all of economics is wrong. Are there commodities markets with open entry and no open collusion where MR!=MC? (Where marginal cost is defined as the cost of bringing on a new production line, not just producing one more unit). Non-commodity markets get quite complicated. Often the market bifurcates into a set of premium brands and a set of low cost brands. Premium brands often try to get a monopoly over one subset of customer, who need some special feature, or try to build their brand as something special, or otherwise differentiate. Premium brands explicitly do not compete on price. Salesmen will say stuff like, "Look I know we are pricy. If you want the el cheapo software, don't buy us. Buy us if you want the good stuff." If the market just has premium brands, that all price way above cost of production, someone is going to try to enter the market with a lower cost product. I never gathered what point Keen was trying to make, not what he was saying that was both novel and true.