CSS SEMINAR - Ernesto Carrella

Friday, February 28, 3:00 p.m.
Center for Social Complexity Suite
Research Hall, Third Floor

TITLE: Sticky Prices Microfoundations in a Supply Chain Agent Based Model

Ernesto Carrella, PhD Candidate
Department of Computational Social Science
George Mason University

ABSTRACT: I build a simple supply chain model with minimal rationality agents and show how sticky prices are necessary to achieve correct prices and quantity. Stickiness is necessary because the effect of price changes takes time to propagate within a supply chain and changing prices quickly leads to noise and wrong equilibria. I then extend the model to deal with inventories, monopolies and learning.

The agents within the model price their goods in a simple feedback loop, trying to match today's sales with today's production. In a single sector economy the faster the price changes, the quicker the agents reach equilibrium. This is because price changes have immediate effects. With multiple sectors there is a delay between a price change and its effects; this delay ruins agents' feedback causing their prices to overshoot and undershoot out of control. Agents can easily manage by slowing down the price changes so that their feedback is not fooled by supply chain delays. The main advantage of this model is the ability to explain price stickiness without the need of adjustments and menu costs or kinks in demand. Rather agents price their good by trial and error, uncertain about what the real effect of a new price is; so, when it takes time for the price to show its effect, the agents slow down their decision making accordingly. Price-stickiness here is not a poor substitute of total flexibility, it is necessary for the agents to deal with a slowly adapting world.