A Computational Approach to Modeling Commodity Markets

We apply agent based computer techniques to develop a modeling framework that can be used to study all aspects of commodity markets. The goal is to use advances in computation to study the micro level behavior of the market and its players. This work is motivated by the understanding that the non-equilibrium dynamics of the transitioning markets can best be analyzed through an experimental framework. The experimental framework makes it possible to observe not only the equilibrium but also the disequilibrium and transition to the equilibrium. The transient dynamics that lead to the equilibrium can sometimes provide the most insightful observations and result in innovative discoveries and explanations. Such transients cannot be studied through traditional closed form economic models. Our framework provides users the ability to control individuals' preferences, behavior, market elements, initial conditions, trading mechanisms along with various other parameters. This facilitates the study of different economic structures, institutions, policies and strategies in isolation. A detailed representation of the consumers, producers and the market is used to study the micro level behavior of the market and its participants. We first describe the computational framework and its main modules. The later part describes a case study that examines the decentralized market in detail; specifically the options available for matching the buyers and suppliers in a synthetic market. The study illustrates the sensitivity of the outcome of various economic variables, such as clearing price, quantity, profits, social welfare, to different schemes for matching buyers and suppliers in a computational setting. Our results, based on seven different matching orders show that the results can vary dramatically for different pairing orders. This variation is found to be even higher for markets with a larger number of participants. This result has important implications for computational modeling based analysis. The user needs to be cognizant of the sensitivity of the ordering scheme and hence should use statistical methods for ensuring the robustness of the results.