Evolving market structure: An ACE model of price dispersion and loyalty

We present an agent-based computational economics (ACE) model of the wholesale "sh market in Marseille. Two of the stylized facts of that market are high loyalty of buyers to sellers, and persistent price dispersion, although it is every day the same population of sellers and buyers that meets in the same market hall. In our ACE model, sellers decide on quantities to supply, prices to ask, and how to treat loyal customers, while buyers decide which sellers to visit, and which prices to accept. Learning takes place through reinforcement. The model explains both stylized facts price dispersion and high loyalty. In a coevolutionary process, buyers learn to become loyal as sellers learn to o!er higher utility to loyal buyers, while these sellers, in turn, learn to o!er higher utility to loyal buyers as they happen to realize higher gross revenues from loyal buyers. The model also explains the e!ect of heterogeneity of the buyers. We analyze how this leads to subtle di!erences in the shopping patterns of the di!erent types of buyers, and how this is 0165-1889/01/$ see front matter ( 2001 Elsevier Science B.V. All rights reserved. PII: S 0 1 6 5 1 8 8 9 ( 0 0 ) 0 0 0 3 3 6 1For example, according to Royal Mail (1999) `more than 25 percent of all people do not consider themselves loyal to any businessa, implying that about 75% is loyal to some business. related to the behavior of the sellers in the market. ( 2001 Elsevier Science B.V. All rights reserved. JEL classixcation: C70; D40; D80; L10; L70