Artificial Life VI

How Do Firms Transition Between Monopoly and Competitive Behavior? An Agent-Based Economic Model

Michael de la Maza
Redfire Capital Management Group

Ayla Ogus
Department of Economics, Boston College

Deniz Yuret
Artificial Intelligence Laboratory, Massachusetts Institute of Technology


Artificial life proponents have long suggested that artificial life will revolutionize how scientists approach a variety of problems. In this paper we describe an application of artificial life techniques to studying a fundamental problem in economics: How does a firm transition from monopoly behavior to competitive behavior as other firms enter the market? In traditional economic models, firms are critical, dynamic players, but whether a firm is a monopoly or is in competition with other firms is set in the model, and each firm solves the profit maximization problem under the assumption that it has access to the market demand function. In contrast, the firms in our artificial life simulation do not have access to any global information about the market. Rather, they decide how to change the price at which they offer to sell their product based on local information. The resulting global behavior that arises from this local price-setting behavior is what tradit! ional economic theory predicts w hen firms act on global information. Hence, our simulation provides a proof by example that simple, local rules of interaction can create the global regularities observed and predicted by economists. In this paper we describe the various agents in the modelfirms, consumers, capital suppliers, labor suppliers-and present the results of several simulations of the model.

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