Ab initio simulation of market dynamics

Abstract

We provide simple models for the utility function (or psychology) of an actor trading a multitude of goods for money. In this framework, money has no intrinsic consumption value, but is required as a medium of exchange. A collection of such actors are then simulated interacting through market rules which create a double auction for each of the goods. This framework captures the self-consistent, rational behavior of independent actors, including how they make compromises between purchases of different goods; so goes beyond price-demand curves, and also generates the small-scale fluctuations from individual trades. We find that stable price formation requires a model that includes time-preference for the actors. Fluctuations in prices show a distribution with algebraic tails. Including inflation expectations leads to complex, damped or un-damped price oscillations. We attempt to model the dynamics of input-output economic models, but find it difficult to keep prices stable with the assumptions employed.

arXiv comment12 pages, 14 figures. Some mistakes in figure captions have been corrected compared to version 1; also additional references, clearer explanations and a new figure (figure 14) were added