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Competition in Intermediated Markets:

Statistical signatures and critical
densities

**CPM Report No.: 01-79**

*By: Scott Moss
*

Date: 1^{st} March 2001

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Abstract

In conventional economic theory, competition is an unmodelled process that
is claimed to drive all economic actors to behave as if they were constrained
optimisers. What is actually modelled in conventional economic theory
is either a competitive equilibrium that is said to capture the result
of the unmodelled competitive process or a game between two or, occasionally,
among three agents. The common element in these approaches is the absence
of any consideration of the effect of interaction among more than three
economic actors at any one time. This is despite the natural presumption
that such interaction is essential to any process of competition.
The purpose of this paper is to demonstrate that the interaction excluded
from conventional economic theory gives rise to the distributions of data
observed in real markets. The well known “fat-tailed” (leptokurtic)
distributions found in high frequency time series data for financial markets
is shown to characterise high frequency retail market data as well.
This and other statistical signatures of real markets are replicated in
an abstract simulation model of markets in which intermediaries (brokers
or jobbers) can function. It is shown that a high density of agents
in the social network is necessary for intermediation to be viable and
for the preponderance of demands to be satisfied. Moreover, the leptokurtic
statistical signature characterises only markets satisfying that density
condition.

**Keywords**: leptokurtosis, intermediation, intermediated markets, social
simulation, statistical signatures, self organised criticality

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