Best of 2012: Cartels Are an Emergent Phenomenon, Say Complexity Theorists

“The price of gas is a puzzle. Monitor the average price in gas stations in a particular city and it will vary dramatically, sometimes in a matter of hours and often in ways that appear cyclical. 

Economist have long scratched their heads over this kind of pattern. One explanation is that this behaviour emerges when two competing companies change their pricing strategy at each stage by reacting to the other. The resulting behaviours are known as Edgeworth Price Cycles.

The problem is that gas station prices are not controlled by two competing players but many competing retailers. It’s easy to assume that the many-body problem produces similar patterns but nobody has been able to show this. 

Until now. Today Tiago Peixoto and Stefan Bornholdt, physicists at the University of Bremen in Germany, show how a more complicated model with many buyers and sellers reproduces this kind of behaviour. 

But it also goes further. Peixoto and Bornholdt say that when condition are right, cartel-like behaviour emerges naturally without collusion between sellers.    

Continued…