Why Should an Economy Be Competitive?

A new look at the well-known trade-off between efficiency and equality with an agent-based model is provided. By way of a computer program, the interactions of agents producing and trading goods within different market structures are simulated by our study, which looks at the resulting production and distribution of welfare among agents at the end of an arbitrarily large number of iterations. Two market mechanisms are compared: the competitive market (a double auction market in which agents outbid each other in order to buy and sell products) and the random market (in which products are allocated randomly). Our results first confirm that the superior efficiency of the competitive market comes at a very high price in terms of inequality compared with the random market. The effect of agent rationality in production and auctioning is further explored (i.e., different information sets used or not by the agents in making their choice) and although rationality is observed to affect efficiency only at the margin, inequalities can be very strongly affected by the behavior of the agents. This latter result suggests that market mechanisms can ensure optimal efficiency under certain constraints, but that the degree of inequality emerging from a certain market design can strongly depend on the rationality of the agents.