What drives markups? Evolutionary pricing in an agent-based, - - PowerPoint PPT Presentation

What drives markups?

Evolutionary pricing in an agent-based, stock-flow consistent, macroeconomic model Pascal Seppecher1, Isabelle Salle2, Marc Lavoie1

1Université de Paris 13, CEPN, 2Utrecht University School of Economics

Congrès de l’Association Française d’Economie Politique

Thursday, July 6th, 2017

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 1 / 29

En guise d’introduction

How markups move, in response to what, and why, is however nearly terra incognita for macro. . . we are a long way from having either a clear picture or convincing theories, and this is clearly an area where research is urgently needed. Blanchard (2008) The State of the Macro

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 2 / 29

Contents

1

Model A stock-flow consistent agent-based model A model of collective adaptation

2

Simulations Baseline Technological shock Behavioral shock

3

Conclusion

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 3 / 29

Model

1

Model A stock-flow consistent agent-based model A model of collective adaptation

2

Simulations

3

Conclusion

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 4 / 29

Model A stock-flow consistent agent-based model

Jamel: an agent-based post-Keynesian model

Agent-based: multiple agents (hundreds of firms, thousands of households — but only one bank), heterogenous agents, endogenous heterogeneity, radical decentralisation: no planner, no auctionneer, no access to any macro-information, all interactions are direct and individual. Post-Keynesian: procedural rationality, fundamental uncertainty, endogenous money, stock-flow consistency.

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 5 / 29

Model A stock-flow consistent agent-based model

Structure of real flows

Sector 2 (consumption goods) Sector 3 (investment goods) Sector 1 (intermediate goods) Workers labor consumption goods intermediary goods investment goods investment goods investment goods labor labor Capitalists consumption goods

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 6 / 29

Model A model of collective adaptation

Endogenous heterogeneity of behaviors

Dynamic, endogenous heterogeneity, resulting from the action of two simultaneous opposing forces: Differentiation, by innovations and errors, Homogenization, by selection and imitation.

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 7 / 29

Model A model of collective adaptation

Collective (non-intentional) adaptation

Three mechanisms of collective adaptation: Short-run: heterogeneity. If the diversity of behaviors is large enough, the set contains the adapted behavior to new conditions. Medium-run: self-reinforcement. The firms with the adapted behaviors grow faster, thus they gain and play a heavier role in the resulting macro behavior. Long-run: selection and imitation. Competitive pressures force firms that have an inadequate behavior to adopt observed successful behaviors or to disappear.

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 8 / 29

Model A model of collective adaptation

Endogeneisation of the markups ϕ

Heterogenous markups (each firm i has its own markup ϕi), The markup of each firm ϕi changes continuously following a random walk (small random mutations), There are two motives of bankruptcy:

◮ If the firm becomes insolvent (ie if liabilities > assets), ◮ It the firm loses all its fixed capital.

If a firm i goes bankrupt:

◮ The bank refunds the firm, ◮ The firm gives up its markup, ◮ It adopts a new markup copied on the one of a surviving firm j

ϕi = ϕj

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 9 / 29

Model A model of collective adaptation

Resolution of the high-margins/market-shares trade-off

⇒ For each firm, there is a trade-off between high margins and

market shares;

⇒ This trade-off will be solved collectively, ie by endogenously

eliminating the markups incompatible with market conditions.

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 10 / 29

Simulations

1

Model

2

Simulations Baseline Technological shock Behavioral shock

3

Conclusion

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 11 / 29

Simulations Baseline

Baseline Simulation: an Emergent Structure of Markups

(a) Baseline simulation

S1 S2 S3

200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 0.1 0.2 0.3 0.4 0.5

(b) 100 replications

500 1000 1500 2000 0.0 0.1 0.2 0.3 0.4 0.5 0.6 period mark-up (S1) mark-up (S2) mark-up (S3)

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 12 / 29

Simulations Baseline

Markups Selection & Endogenous Heterogeneity

−0.2 0.2 0.4 0.6 0.8 1 1.2 1.4 −0.5 0.5 1 Markup Return On Assets −0.2 0.2 0.4 0.6 0.8 1 1.2 1.4 −0.5 0.5 1 Markup Return On Assets −0.2 0.2 0.4 0.6 0.8 1 1.2 1.4 −0.5 0.5 1 Markup Return On Assets −0.2 0.2 0.4 0.6 0.8 1 1.2 1.4 0.05 0.1 0.15 0.2 Markup Market shares (%) −0.2 0.2 0.4 0.6 0.8 1 1.2 1.4 0.05 0.1 0.15 0.2 Markup Market shares (%) −0.2 0.2 0.4 0.6 0.8 1 1.2 1.4 0.05 0.1 0.15 0.2 Markup Market shares (%) −0.2 0.2 0.4 0.6 0.8 1 1.2 1.4 0.05 0.1 0.15 0.2 Markup Inventories (%) −0.2 0.2 0.4 0.6 0.8 1 1.2 1.4 0.05 0.1 0.15 0.2 Markup Inventories (%) −0.2 0.2 0.4 0.6 0.8 1 1.2 1.4 0.05 0.1 0.15 0.2 Markup Inventories (%)

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 13 / 29

Simulations Baseline

Stability of Relative Prices

(a) Sector 1 to Sector 2

Relative price

200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 0.1 0.2 0.3 0.4 0.5

(b) Sector 2 to Sector 3

Relative price

500 1,000 1,500 2,000 0.5 1 1.5 2 2.5

(c) Sector 3 to Sector 1

Relative price

500 1,000 1,500 2,000 0.2 0.4 0.6 0.8 1

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 14 / 29

Simulations Baseline

Amounts of Labor and ‘Natural Prices’

We calculate l1;l2;l3, which are the amounts of labor, direct, indirect and hyper-indirect, required for the production of one unit of good in each sector S1;S2;S3. l1 = 1 q1

• 1+ k1l3

u1dk

• (1)

l2 = 1 q2

• 1+ k2l3

u2dk

• + j2l1

(2) l3 = u3dk q3u3dk − k3 (3)

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 15 / 29

Simulations Baseline

Relative Prices and Natural Prices

(a) Sector 1 to Sector 2

Relative price Natural price

500 1,000 1,500 2,000 0.1 0.2 0.3 0.4 0.5

(b) Sector 2 to Sector 3

Relative price Natural price

500 1,000 1,500 2,000 0.5 1 1.5 2 2.5

(c) Sector 3 to Sector 1

Relative price Natural price

500 1,000 1,500 2,000 0.2 0.4 0.6 0.8 1

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 16 / 29

Simulations Technological shock

Technological Shock on Sector 2

What: simulation of a dramatic, exogenous, technological shock; Where: Sector 2 (consumption goods); How: productivity goes from 100 to 200; When: t = 1000.

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 17 / 29

Simulations Technological shock

Macro-Consequences

(a) Labor Market

S1 S2 S3

500 1,000 1,500 2,000 50 100 150 200 Shock

(b) Labor Market

Capacity Labor demand Labor Supply Employed

500 1,000 1,500 2,000 2,000 4,000 6,000 8,000 10,000 12,000 14,000 Shock

(c) Workforce Distribution

S1 S2 S3

200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 0.2 0.3 0.4 0.5 0.6 0.7 Shock

(d) Ponzi firms

S1 S2 S3

200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 0.2 0.4 0.6 0.8 1 Shock

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 18 / 29

Simulations Technological shock

Relative Prices and Natural Prices

(a) Sector 1 to Sector 2

Relative price Natural price

500 1,000 1,500 2,000 0.1 0.2 0.3 0.4 0.5 0.6 0.7 Shock

(b) Sector 2 to Sector 3

Relative price Natural price

500 1,000 1,500 2,000 0.5 1 1.5 2 2.5 Shock

(c) Sector 3 to Sector 1

Relative price Natural price

500 1,000 1,500 2,000 0.2 0.4 0.6 0.8 1 Shock

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 19 / 29

Simulations Technological shock

Adaptation of markups

(a) Shock on Baseline

S1 S2 S3

200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 0.1 0.2 0.3 0.4 0.5 Shock

(b) 100 replications

500 1000 1500 2000 0.0 0.1 0.2 0.3 0.4 0.5 0.6 period

shock on productivity in S2

mark-up (S1) mark-up (S2) mark-up (S3)

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 20 / 29

Simulations Behavioral shock

Behavioral Shock on Sector 2

What: simulation of a dramatic, exogenous, behavioral shock; Where: Sector 2 (consumption goods); How: markup goes from approx. 0.2 (on average) to 0.6; When: t = 1000.

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 21 / 29

Simulations Behavioral shock

Adaptation of markups

(a) Average markups (weighted by market shares)

S1 S2 S3

200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 0.1 0.2 0.3 0.4 0.5 Shock

(b) Average markups (arithmetic)

S1 S2 S3

200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 0.1 0.2 0.3 0.4 0.5 Shock

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 22 / 29

Simulations Behavioral shock

Relative Prices and Values

(a) Sector 1 to Sector 2

Relative price Natural price

500 1,000 1,500 2,000 0.1 0.2 0.3 0.4 0.5 Shock

(b) Sector 2 to Sector 3

Relative price Natural price

500 1,000 1,500 2,000 0.5 1 1.5 2 2.5 Shock

(c) Sector 3 to Sector 1

Relative price Natural price

500 1,000 1,500 2,000 0.2 0.4 0.6 0.8 1 Shock

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 23 / 29

Simulations Behavioral shock

Deformation of the production structure

(a) Relative capacities of production

1.1 1.2 1.3 1.4 1.5

S2/S1

0.4 0.5 0.6 0.7 0.8

(S1+S2)/S3

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 24 / 29

Conclusion

1

Model

2

Simulations

3

Conclusion

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 25 / 29

Conclusion

Conclusion (1/4)

Our model is a complex system, it includes several interdependent sectors. These interdependencies are both real (labor and commodities) and monetary (money and debts). Thanks to the radical decentralization principle of ABM, and guided by the observations of Alchian (1950), we simulate the endogenous evolution of individual and aggregate pricing behaviors under the pressure of competition.

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 26 / 29

Conclusion

Conclusion (2/4)

As the model includes three industrial sectors, we can observe the emergence of a structure of relative prices. Relative prices appear to “gravitate” around their “natural prices”, that is, around the ratio of the quantities of labor required for the production of the merchandises. Thus, the system of the “natural prices” dominates the evolution of the relative prices (and thus the evolution of the markups, since at the microeconomic level, markups determine prices).

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 27 / 29

Conclusion

Conclusion (3/4)

Last but not least, it is worth noting that our model is definitively eclectic, featuring ingredients from different and sometimes competing schools of thought. The model includes the post-Keynesian theory of endogenous money and its stock-flow consistent approach; it includes the concerns of Leontief for industrial interdependence; it is consistent with the classical idea that industrial prices gravitate towards values that are roughly proportional with the sum of the direct and indirect quantities of necessary labor, as can be found in Sraffa, Pasinetti and Lee; it also relies on Simon’s procedural rationality and on Alchian’s evolutionary behavior.

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 28 / 29

Conclusion

Conclusion (4/4)

Yet, our model is not a chimera. Every ingredient is used because it plays a judicious role in the construction of the model, and results in a coherent synthesis that goes beyond the theoretical borders that fragment economics. This type of models has then the strong advantage of (re)activating the dialog and the exchanges between parallel and competing schools of thoughts in order to contribute to the emergence of a new, alternative paradigm in (macro)economics.

P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 29 / 29