Evolving Market Structure: A Model of Price-dispersion and Loyalty

Nick Vriend
Virginia Tech, Blacksburg
Vriend@platon.econ.vt.edu
http://www.santafe.edu/~vriend

Alan P. Kirman
GREQAM, Marseille
Kirman@ehess.cnrs-mrs.fr

Abstract

We try to understand the behavior of buyers and sellers on the Marseille wholesale fish market. Two of the stylized facts of that market are high loyalty of buyers to sellers, and persistent price dispersion, although the same population of sellers and buyers meets in the same market hall on every day. We build a minimal model of adaptive agents. Sellers decide on quantities to supply, prices to ask, and how to treat loyal customers. Buyers decide which seller to visit, and which prices to accept. Learning takes place through reinforcement. We analyze the emergence of both stylized facts price dispersion and high loyalty. In a coevolutionary process, buyers learn to become loyal as sellers learn to offer higher utility to loyal buyers, while these sellers, in turn, learn to offer higher utility to loyal buyers as they happen to realize higher gross revenues from loyal buyers.