Why should the economy be competitive?

Abstract

Is a competitive free market the most efficient way to maximize welfare and to equally allocate rare resources among economic agents? Economists usually tend to think this is the case. This paper presents a preliminary attempt through an object-oriented multi-agent model to address this question. Agents which are alternatively producers, sellers, buyers and consumers participate in a market to increase their welfare. Two market models are compared: the competitive market, which is a double auction market in which agents attempt to outbid each other in order to buy and sell products, and the random market, in which products are allocated in a random manner. The comparison focuses on wealth creation (a common study) and above all on inequalities in resources allocation (much less frequently addressed). We compute and compare in both cases the money and utility generated within the markets as well as a Gini index that characterizes the degree of inequality in the allocation of these values among agents. In contrast with earlier works, we also compare welfare creation and distribution with more or less intelligent agents who use more or less information provided by the market. The results of hundreds of simulations are analyzed to find that, as is well known, the competitive market creates more value overall but, and generally less accepted and discussed by economists, at the expense of a much greater inequality. We further find that whereas the use of market information by the producers leads to less inequality in both types of markets, the inequality induced by the competitive market depends on the behavior of the agents, suggesting that it is both the institutions and the agents that foster inequality in competitive market structures. © Springer-Verlag Berlin Heidelberg 2011.