Agent-based models and industrial organization theory. A price-competition algorithm for agent-based models based on Game Theory

Purpose: Simulating markets using agent‐based models must consider pricing. How‐ ever, the strategic nature of prices limits the development of agent‐based models with endogenous price competition. Methods: I propose an agent‐based algorithm based on Game Theory that allows us to simulate the pricing in different markets. I test the algorithm in five theoretical economic models from the industrial organization literature. Results: In all cases, the algorithm is capable of simulating the optimal pricing of those markets. It is also tested in two more cases: one in which the original work fails to predict the optimal outcome, and another one that is quite complex to solve analyti‐ cally. Lastly, I present two potential extensions of this algorithm: one dynamic, and another one based on quantity competition. Conclusions: This algorithm opens the door to the extensive inclusion of pricing in agent‐based models, but also, it helps to establish a link between the industrial organi‐ zation literature and the agent‐based modeling.