
Cartels Are an Emergent Phenomenon, Say Complexity Theorists - pg
http://www.technologyreview.com/blog/arxiv/27512/
======
wisty
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.

~~~
bootload
_"... 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-7215...](http://www.flickr.com/photos/bootload/5518902314/in/set-72157623796441755)

[1]
[http://www.flickr.com/photos/bootload/collections/7215762379...](http://www.flickr.com/photos/bootload/collections/72157623796440209/)

~~~
wisty
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.

------
ScottBurson
_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.

~~~
tikhonj
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.

~~~
uiri
I thought that cartel implies that sellers collude to artificially raise
prices and limit competition. If this is the natural result of a free market,
it seems that it is therefore not a cartel, just that given competitor price
information, when the seller reacts first the low-priced sellers are likely to
raise their prices (get more profit when the buyers come) rather than the
high-priced sellers lowering their prices (gain customers from other sellers)
which happens when buyers react first.

It is an interesting observation/model but calling it a cartel is a little bit
over the top. The good/service reaches its market price regardless of whether
it gets there from lower or higher prices.

~~~
jbooth
You're falling into the trap of worshipping emergent outcomes like they're a
golden calf or something.

We like free-market economics because they get good results. If there's a
market failure and the standard free-market economics aren't applying, like in
the case of a cartel, then that's bad and we want to change it. Bad results
are bad, good results are good.

~~~
anamax
> If there's a market failure and the standard free-market economics aren't
> applying, like in the case of a cartel, then that's bad and we want to
> change it. Bad results are bad, good results are good.

It must be nice to live in a world without regulatory capture.

"Want to change" doesn't imply "will do less harm than good" in this world. In
fact, "want to do good" is pretty much the basis of all of the really huge
problems we have.

~~~
jbooth
It must be really great to live in a world where you can impute arguments to
other people - guaranteed correctness, without any hassle!

Since you didn't make an argument I won't do the same disservice to you. The
relevant laws in this case are anti-trust. I support them, generally, as did
TR who introduced them. Regulatory capture is a problem to be battled, not a
reason to throw your hands up and say "oh well, guess i'll just let myself get
screwed by a couple people who managed to lock up an industry through
collusion".

~~~
anamax
> The relevant laws in this case are anti-trust. I support them, generally, as
> did TR who introduced them.

That's nice, but the question is whether the realized benefits exceeded the
incurred costs.

> Regulatory capture is a problem to be battled

You're assuming that you can win the war. Some evidence would be nice.

------
pash
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).

~~~
lnguyen
That's why this study was done by physicists who tend to not have that
particular issue with not completely understanding the system and interactions
or reducing things down to "toy" models to as a starting point to build up
that understanding.

Yes, they are starting with a simple and straightforward model and limiting
the parameters they vary. But they can produce what looks to be emergent
cartel behavior.

That's the important takeaway: a simple model is unexpectedly able to do that.
AKA you don't need a complicated model with any number of variable parameters.

[Also, what they've done here is study the statistical properties of the
system. You're not going to be able to "predict" or replicate the exact
behavior/configuration of one particular instance unless you do know its
starting parameters in detail. But looking at the statistical properties
should smooth that out.]

~~~
pash
_> That's why this study was done by physicists who tend to not have that
particular issue with not completely understanding the system and interactions
... That's the important takeaway: a simple model is unexpectedly able to do
that._

Yes, I know. That's why my criticism was directed at the Tech Review article
that totally misinterprets the paper, and indirectly at all of the comments in
this thread that make the same mistake. The paper does not describe how gas-
pump prices change; it does not describe how any actual market actually works.
It does not identify time to react to price signals as the key to well-
functioning markets; that is an artifact of the highly stylized model
employed.

As I wrote in the first line of my comment, the take-away is that cartel-like
behavior is _possible_ without direct coordination, not that it is actually
happening, ever has happened, or ever will happen. The rest of my comment was
meant to point out why we can't draw those conclusions.

EDIT: And, by the way, there are lots of other ways to show that cartel-like
behavior is possible without concerted price-fixing. Several authors have
shown this in a game-theoretic framework, and there is a whole literature on
indirect communication among economic competitors that has arisen out of law-
and-economics analysis of anti-trust regulation.

~~~
lnguyen
I view the mention by Technology Review and the paper of gas-pump price
changes as just giving an example and context that most readers will
understand or at least believe they understand. If the assumption is that the
cartel-like behavior is coordinated, then that a model that is clearly not
coordinated exhibits similar qualitative behavior should give pause to that
assumption.

I agree that it's not an actual explanation or a model of any actual market.
How both the article and paper are worded is a bit ambiguous on that point
most likely for purposes of attracting a bit of attention and grant money. But
if you look closely, there's no outright claim in either.

As for seemingly ignoring existing literature in another field, it's kind of
par for the course. A lot of "discoveries" made early on in complexity
research on sandpiles were already well-documented in civil engineering.

------
rcthompson
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".

~~~
MCompeau
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
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
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
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.

~~~
Retric
_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._

There are two conditions, high number of cycles, and company's reacting faster
than customers. As I said there is a high number of cycles because company's
can change their price for new contracts every day or hour etc. The second
condition that customers reactor slower which does not mean they can't renew
at the end of their term just that they don't react as fast to changing prices
as companies do.

Personally, I have gone though several cycles of renewing my contract and I
must say I don't price shop on the day I sign the new contract. Do you?

~~~
rcthompson
I guess the point I was trying (badly) to make is that long-term contracts are
not the same thing as buyer inflexibility, though they can be a cause of it.

------
bravura
_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.

------
brador
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
> _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>

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?

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

------
rcthompson
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
The fast ones become rich. They perform trades equivalent to front-running
and/or scalping. The enterprising fast becomes a middleman to the slow.

------
nsedlet
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.

------
funthree
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>

~~~
joshAg
would you mind expanding on why you think this result means capitalism is
flawed?

~~~
_delirium
A more limited way of putting it would be that (neo-)classical economic theory
has some flaws, in that it assumes prices will track supply/demand balance and
maximize market participants' utility (as expressed via price preferences), in
the absence of state distortion of markets, which appears not to always be
true, since markets can be self-distorting. Not surprising given that most
complex systems have strange pathologies in the form of feedback loops, local
attractors, etc., but interesting to see this study nonetheless.

Whether that means capitalism is flawed depends on the extent to which you
consider the neoclassical utility-maximization explanation of how markets work
to be an important part of the justification for capitalism. It probably
undermines the utopian libertarian vision of a laissez-faire, unregulated
economy in which everything is free and everything is perfectly allocated,
more than it undermines the U.S./European brand of pragmatic market economies.

~~~
yummyfajitas
_...(neo-)classical economic theory has some flaws, in that it assumes prices
will track supply/demand balance and maximize market participants' utility..._

No, classical economic theory doesn't _assume_ this. It derives this as a
conclusion under some specific assumptions: demand and supply are elastic,
many non-colluding buyers and sellers, good information and low transaction
costs. The _conclusion_ of classical economic theory is that under the
circumstances I described above, prices will stabilize near a price P
satisfying supply(P)=demand(P), where "near" is bounded by the size of
transaction costs.

The paper under discussion is also classical economic theory, it just makes
different assumptions: it assumes perfectly _inelastic_ demand (i.e., users
have no choice but to buy) and poor information/high transaction costs (buyers
can only switch sellers infrequently and can't switch arbitrarily). It also
assumes that sellers only copy the pricing strategies of others, and never
come up with their own (e.g., no aggressive price competition).

It's not a "flaw" in classical economic theory, it's just applying classical
economic theory to a new circumstance. It seems like it might be a good model
for certain markets - mandatory insurance for example (auto collision
insurance or health insurance in MA), display both demand inelasticity (you
are legally obligated to buy) and comparison is difficult.

~~~
1gor
Aah, but (neo)classical economic theory is _defined_ by its unrealistic
assumptions about reality.

Essentially, you are claiming that North Korea is also a democracy, only
without free elections.

~~~
yummyfajitas
Neo-classical economics is merely an approach to economics based on game
theory and utility maximization (as distinguished from, e.g., behavioral
economics). The article we are discussing is a perfect example of neo-
classical economics - it's pure game theory.

If you want to argue that the assumptions made by the article are more
accurate in general than the more common assumptions (good information, low
transaction costs, elastic supply and demand), be my guest.

------
scotty79
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.

------
Sniffnoy
"Complexity theorists"?

~~~
rcthompson
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
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
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
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.

