Couple of months ago I have started a series of posts on price formation in the free market or how and why the free market does (not) work. This text is a slightly detour from the part four of the series. In which I would like to delve into interesting properties of the gameI have introduced in the part four.

In the part four I have asked you to imagine that the market consists of two competing companies, which produce almost identical products. Each of the companies can charge a high price or a low price. If one company wants to charge low price, then all consumers would prefer buying its product and not the competitors. I have assumed that there are 100 consumers and that companies produce products for all consumers (namely they always produce 100 units of the product), high price is 5 monies, low price is 3 monies and production costs are 0.5 monies. In this post I would like to remove some of these simplifying assumptions and discuss how the model works if different numbers are selected.

Few months ago I have started an interesting topic about the price formation. This topic is rather important in the contemporary context as it is often claimed (by the media and some lobbyists) that we should "let (the markets) go" (fr. Laissez-faire) with out any regulation or influence from the government. Supposedly free markets would discover the fairest prices and allocate the resources to the most capable. Yet for this to be true, some assumptions must hold. One of these assumptions is the presence of fierce competition and this assumption seems to not hold well as in the repeated games cooperation emerges.

Here we would like to share a 3rd-party material about this. We have already shared some material related to the prisoner's dilemma, but we have not properly discussed how this game is played. The video below, by "This Place", properly introduces this game as well as its iterated version. We invite you to watch the video and contemplate why the cooperation emerges in this setup? How this model could be useful in understanding our society?

Couple of months ago I have started a series of posts on price formation in the free market or how and why the free market does (not) work.

In the first part of the series we have discussed economic laws of supply and demand. We have learned that the cheaper the product is the more people will be willing to buy it. Also that the more people are willing to pay for the product, the more of the product will be produced.

In the second part we have discussed a simple example in which printing press failed to predict the demand for the book. We have discussed how non-optimal prices emerge as a result of this miscalculation.

In the third part of the series we have discussed the implications of the cobweb model, which attempts to explain how the prices and produced quantity converge to equilibrium. We have noted that this convergence is not immediate and may take some time.

Previously we have mentioned that supply and demand laws should be reformulated as areas. As anything above the supply curve is good for the supplier and anything below the demand curve is good for the customer. What we have not yet talked about is why the curves are where they are.

In the recent few days we have replaced another four Java applets with their HTML5 counterparts. The following articles were updated:

Couple of months ago I have started a series of posts on price formation in the free market or how and why the free market does (not) work.

In the first part of the series we have discussed economic laws of supply and demand. We have also mentioned the "sweet spot" of the supply-demand model - equilibrium price. But we did not cover how one would discover the equilibrium price.

In the second part we have discussed a simple example in which printing press failed to predict the demand for the book. We have discussed how non-optimal prices as well as certain dynamics might emerge.

In this installment (a third part) of the series, we discuss another classical, but more sophisticated, model, which attempts to explain what happens if the knowledge about supply and demand laws is not perfect. The cobweb model aims to show how the self-organized optimal prices emerge over time. Note that we have already discussed (see this post) how self-organized price emerges from the Kirman model and that this price is far from reflecting underlying economic values.