Agent Based Models and Common Value Auctions B. Wade Brorsen

Agent based models (ABM) simulate the actions and interactions of autonomous agents to determine effects on the system as a whole.

3 Agent-Based Model: Bottom-up Method – Carry out the experiments with programmed agents – Interactive agents with simple rules Initial condition Observed Market Equilibrium

Applications of ABM Biology Land Use Urban Planning Oligopoly Auctions

Contrast with Traditional Theory Fully Rational a.Maximize profit b.Maximize expected utility Boundedly Rational Do what worked last time

Game Theory Small number of players Industrial organization International trade Nash equilibrium

Oligopoly Models Cournot Bertrand Stackelberg

Auctions Private value Common value Affiliated value

Meyers (1988) Matagorda County rice auctions Bids increased as # buyers increased Winner’s curse Bid shading

Relevant Tools to Study Auctions Theoretical Human experiments Agent-based models

Agent Based Models Computerized agents Follow specific rules Simulation or optimization?

Stochastic Global Optimization Evolutionary Algorithms Genetic algorithms Particle swarm Random Restarts

13 Market 1 particle 1 particle K Agent 1 Agent 2 Strategy 1 Local Best 1 Local Best K Market K Local Best 1 Local Best K Global Best Profit particle 1 particle K Select New strategy Select New strategy Strategy K

Convergence to Equilibrium

Software Many canned packages - Mostly land use We use Java Can be slow

Revisiting Mandatory Price Reporting Act of 1999 Using an Agent-Based Model

Objective Develop an agent-based common-value auction to determine expected effect of Livestock Mandatory Price Reporting Act on packer market power

MPR Literature Previous theoretical work disagrees Recent econometric work shows beef packers’ market power increased after MPR

Theoretical Framework Previous theoretical work follows Cournot theory Auction model is closer to how cattle are actually purchased

Auction Structure First-price common-value auction with a reserve price Common value for the packers is 0.5

Post MPR Results CategoryFull Noise Seller Reduced Noise Buyer Reduced Noise Average winning bid price Reserve price Buyer 1 expected revenue Buyer 2 expected revenue Seller expected revenue

Application to Cattle Sales Reducing either the seller’s or buyers’ uncertainty through USDA-AMS reports created by MPR benefits the seller