What drives markups? Evolutionary pricing in an agent-based, stock-flow consistent, macroeconomic model Pascal Seppecher 1 , Isabelle Salle 2 , Marc Lavoie 1 1 Université de Paris 13, CEPN, 2 Utrecht 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 Model 1 A stock-flow consistent agent-based model A model of collective adaptation Simulations 2 Baseline Technological shock Behavioral shock Conclusion 3 P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 3 / 29
Model Model 1 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 consumption goods labor Capitalists Sector 2 (consumption goods) labor Sector 1 intermediary goods (intermediate goods) consumption goods Workers investment goods investment goods labor Sector 3 (investment goods) investment 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 ϕ i ), The markup of each firm ϕ i 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 ϕ i = ϕ j 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 Model 1 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 (b) 100 replications (a) Baseline simulation 0.6 0.5 0.5 0.4 0.4 0.3 0.3 0.2 0.2 0.1 0.1 mark-up (S1) mark-up (S2) mark-up (S3) 0 0.0 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 0 500 1000 1500 2000 S1 S2 S3 period P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 12 / 29
Simulations Baseline Markups Selection & Endogenous Heterogeneity 1 1 1 Return On Assets Return On Assets Return On Assets 0 . 5 0 . 5 0 . 5 0 0 0 − 0 . 5 − 0 . 5 − 0 . 5 − 0 . 2 0 0 . 2 0 . 4 0 . 6 0 . 8 1 1 . 2 1 . 4 − 0 . 2 0 0 . 2 0 . 4 0 . 6 0 . 8 1 1 . 2 1 . 4 − 0 . 2 0 0 . 2 0 . 4 0 . 6 0 . 8 1 1 . 2 1 . 4 Markup Markup Markup 0 . 2 0 . 2 0 . 2 0 . 15 0 . 15 0 . 15 Market shares (%) Market shares (%) Market shares (%) 0 . 1 0 . 1 0 . 1 0 . 05 0 . 05 0 . 05 0 0 0 − 0 . 2 0 0 . 2 0 . 4 0 . 6 0 . 8 1 1 . 2 1 . 4 − 0 . 2 0 0 . 2 0 . 4 0 . 6 0 . 8 1 1 . 2 1 . 4 − 0 . 2 0 0 . 2 0 . 4 0 . 6 0 . 8 1 1 . 2 1 . 4 Markup Markup Markup 0 . 2 0 . 2 0 . 2 0 . 15 0 . 15 0 . 15 Inventories (%) Inventories (%) Inventories (%) 0 . 1 0 . 1 0 . 1 0 . 05 0 . 05 0 . 05 0 0 0 − 0 . 2 0 0 . 2 0 . 4 0 . 6 0 . 8 1 1 . 2 1 . 4 − 0 . 2 0 0 . 2 0 . 4 0 . 6 0 . 8 1 1 . 2 1 . 4 − 0 . 2 0 0 . 2 0 . 4 0 . 6 0 . 8 1 1 . 2 1 . 4 Markup Markup Markup 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 (b) Sector 2 to Sector 3 2.5 0.5 2 0.4 1.5 0.3 1 0.2 0.5 0.1 0 0 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 0 500 1,000 1,500 2,000 Relative price Relative price (c) Sector 3 to Sector 1 1 0.8 0.6 0.4 0.2 0 0 500 1,000 1,500 2,000 Relative price P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 14 / 29
Simulations Baseline Amounts of Labor and ‘Natural Prices’ We calculate l 1 ; l 2 ; l 3 , which are the amounts of labor, direct, indirect and hyper-indirect, required for the production of one unit of good in each sector S 1 ; S 2 ; S 3 . � � l 1 = 1 1 + k 1 l 3 (1) u 1 d k q 1 � � l 2 = 1 1 + k 2 l 3 + j 2 l 1 (2) u 2 d k q 2 u 3 d k l 3 = (3) q 3 u 3 d k − k 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 (b) Sector 2 to Sector 3 2.5 0.5 2 0.4 1.5 0.3 1 0.2 0.5 0.1 0 0 0 500 1,000 1,500 2,000 0 500 1,000 1,500 2,000 Relative price Natural price Relative price Natural price (c) Sector 3 to Sector 1 1 0.8 0.6 0.4 0.2 0 0 500 1,000 1,500 2,000 Relative price Natural price 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 (b) Labor Market 200 Shock 14,000 Shock 12,000 150 10,000 8,000 100 6,000 4,000 50 2,000 0 0 0 500 1,000 1,500 2,000 0 500 1,000 1,500 2,000 S1 S2 S3 Capacity Labor demand Labor Supply Employed (c) Workforce Distribution (d) Ponzi firms 0.7 1 Shock Shock 0.6 0.8 0.5 0.6 0.4 0.4 0.3 0.2 0.2 0 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 S1 S2 S3 S1 S2 S3 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 (b) Sector 2 to Sector 3 2.5 0.7 Shock Shock 0.6 2 0.5 1.5 0.4 0.3 1 0.2 0.5 0.1 0 0 0 500 1,000 1,500 2,000 0 500 1,000 1,500 2,000 Relative price Natural price Relative price Natural price (c) Sector 3 to Sector 1 Shock 1 0.8 0.6 0.4 0.2 0 0 500 1,000 1,500 2,000 Relative price Natural price P . Seppecher, I. Salle, M. Lavoie What drives markups? AFEP Rennes 2017 19 / 29
Simulations Technological shock Adaptation of markups (b) 100 replications (a) Shock on Baseline 0.6 shock on productivity in S2 Shock 0.5 0.5 0.4 0.4 0.3 0.3 0.2 0.2 0.1 0.1 mark-up (S1) mark-up (S2) mark-up (S3) 0 0.0 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 0 500 1000 1500 2000 S1 S2 S3 period 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
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