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This model is based on buyers' expected behaviour, in contrast with classical models of quality uncertainty, which, in addition to quality variability, tend to assume asymmetric information and are based on the phenomenon of adverse selection. **MEQU** shows that asymmetric information is not necessary for quality variability to damage (or even destroy) a market. It also shows how sharing information, or making aggregate information available, can mitigate the damaging effects of quality variability.

- Set up the model by selecting values for the following
*parameters*: *num-sellers*: Number of sellers in the market.*num-buyers*: Number of buyers in the market.*individual-weight*: Sensitivity of each buyer's quality expectations to her own individual quality experiences.*social-weight*: Sensitivity of each buyer's quality expectations to her neighbours' quality experiences.*network-structure*: Type of network structure that connects pairs of buyers through directed links. There are four network structures implemented:*random*,*preferential attachment*,*double ring*, and*star*. If the network structure chosen is*random*, the value of the parameter*num-links*will determine the number of random links to be created. If the network structure selected is*preferential attachment*, each buyer will join the network linking to*pref-attachment-links*other buyers. Network structures*double ring*and*star*do not require any further parameterisation.*quality-distribution*: Statistical distribution for the quality of the items.*quality-variance*: Variance for the quality distribution (if applicable).- Press the
*setup*button.

The social network (buyers and links) will be represented on the screen. If the*show-network-formation*switch is*on*you will see the dynamics of the network formation. - Press
*go-once*to see the results after just one trading session, or press*go*to start a series of trading sessions. Press*go*again to halt the model.

If the *network-structure* is *random*, then it is created by establishing a certain
number (*num-links*) of directed links between randomly selected pairs of buyers.

If the *network-structure* is *preferential attachment*, buyers are sequentially
added to the network; every buyer who joins the network selects *pref-attachment-links*
other buyers to link to, who are selected with probability proportional to their
number of existing (incoming and outgoing) links. At the beginning of the creation
of this network, while the number of buyers is less than *pref-attachment-links*,
each new buyer links to all existing buyers. This is Barabási and Albert's
preferential attachment model of network growth (See Newman 2003,
sec. VII-B).

If the *network-structure* is *double ring*, all buyers are randomly placed
in a ring (randomly "seated" at a round table) and each buyer links
to the one on her right and to the one on her left.

If the *network-structure* is *star*, one buyer is randomly selected and
bidirectional links between her and each one of all the other buyers are created.

The supply function is constant. There are *num-sellers* sellers
indexed in *i* (*i* = 1,..., *num-sellers*) with *minimum
selling price* for seller *i* being *msp _{i}* =

- Initial reservation price: Each of the
*num-buyers*buyers is indexed in*i*(*i*= 1, 2 ...*num-buyers*), and buyer*i*has initial reservation price equal to*i*. The initial reservation price for each buyer is constant throughout the simulation. - Expected quality (
*q*): The initial expected quality (^{exp}_{i,n}*q*^{exp}_{i,}_{0}) for every buyer is equal to 1. The quality expected by each buyer may (and most often does) vary throughout the simulation, depending on the learning rule and the particular buyer's experiences.

*R _{1,n} >= R_{2,n} >= … >= R_{num-buyers,n}*

Buyers and sellers trade in sessions. In each session, each buyer can buy
at most one product, and each seller can sell at most one product.
In each session *n*, the market is centrally cleared at the crossing
point of supply and demand. Specifically, the number of traded units *y*
in session *n* is the maximum value *i* such that *R _{i,n}
>= msp_{i}* and the market price

*p _{n} = ½ [Min (R_{y,n}, msp_{y+1})
+ Max (R_{y+1,n}, msp_{y})]*

This price-setting formula takes into account the satisfied supply and demand
( *msp _{y} <= p_{n} <= R_{y,n}* ) and the pressure
of the extramarginal supply and demand (

- she has bought a product and she somewhat considers her own experience (
*individual-weight*> 0), or

- someone in her social neighbourhood has bought a product and she somewhat considers her neighbours' experience (
*social-weight*> 0).

- If both buyer
*i*and someone in her neighbourhood has purchased a product:

where*q*^{exp}_{i,n+1}= q^{exp}_{i,n}+ individual-weight· (q_{i,n}- q^{exp}_{i,n}) + social-weight · (meanq_{i,n}- q^{exp}_{i,n})*q*is the quality of the product received by buyer_{i,n}*i*, and*meanq*is the average quality of the products received by buyers in_{i,n}*i*'s social neighbourhood. - If buyer
*i*has purchased a product but no one in her neighbourhood has:*q*^{exp}_{i,n+1}= q^{exp}_{i,n}+ individual-weight · (q_{i,n}- q^{exp}_{i,n}) - If buyer
*i*has not purchased a product but someone in her neighbourhood has:*q*^{exp}_{i,n+1}= q^{exp}_{i,n}+ social-weight · (meanq_{i,n}- q^{exp}_{i,n})

- Choose the number of sellers in the market:
*num-sellers*.

This parameter is used to create the supply function, which remains constant all throughout the simulation. - Choose the number of buyers in the market:
*num-buyers*.

This parameter determines buyers' initial reservation prices and, consequently, the initial demand function. - Select a value for the parameters
*individual-weight*and*social-weight*.

These two parameters determine how buyers update their quality expectations. The parameter*individual-weight*measures the sensitivity of buyers to their own individual experiences, and the parameter*social-weight*measures the sensitivity of buyers to their neighbours' experiences. The social neighbourhood of buyer A is the set of other buyers to whom A links (see next bullet point). Thus,*social-weight*= 0 implies individual learning only (provided that*individual-weight*> 0). - Customise buyers' social network by selecting the
*network-structure*.

- For a
*random*network, select also the number of random links to be formed:*num-links*. The network is formed by creating*num-links*random directed links between buyers.

- For a
*preferential attachment*network, select also the number of links*pref-attachment-links*. This is the number of outgoing directed links for each new buyer which is added to the network as it is formed.

- More links can be created or deleted at runtime using
*num-links*, given any initial network structure. In that case, every possible directed link between two buyers has the same probability of being created or deleted.

- For a
- Select a statistical distribution for the quality of the items. The
quality distribution of every item produced is determined by two parameters:
*quality-distribution*and*quality-variance*.- Parameter
*quality-distribution*can take one of three possible values:*uniform*,*exponential*, or*trimmed normal*. The mean of all three distributions is 1. The trimmed normal is a normal distribution where every value greater than 2 is set back to 2, and every value less than 0 is set back to 0. - Parameter
*quality-variance*determines the variance of the quality distribution, if applicable. The maximum variance for the uniform distribution is 1/3, which correspond to the maximum range allowed: [0,2]. The variance of the exponential distribution is necessarily 1, since its mean is fixed to 1.

- Parameter
- The
*show-network-formation*switch determines whether the dynamics of the network formation are shown (value =*on*) or not (value =*off*).

- Click on
*setup*. This creates the buyers, the sellers, the social network (buyers and links), and displays the initial demand and supply. - To make the model run once (i.e. one trading session) press
*go-once*. To run the model indefinitely, press*go*. Press*go*again to halt the model.

There are a number of ways in which the user can interact with the model. Except for the number of sellers and buyers, the value of every parameter described above can be changed at runtime. Thus, except for potentially those two parameters, the model is always using the values that are shown in the interface. Note that, in particular, the user can create and delete random links in the network as the model runs. This can be conducted by modifying the number of links directly. All links are created or deleted at random. There are also other ways, all of them related to the social network, in which the user can interact with the model at runtime:

- Clicking on
*resize buyers*will switch between (a) showing every buyer with the same size and (b) making buyers' sizes proportional to the square root of the number of social neighbours they have. - Clicking on
*drag and drop*allows the user to change the position of buyers using the mouse. Please click on the button again when finished. *relax network*changes the position of buyers in the network, trying to find a better-looking spatial configuration. Please click on the button again when satisfied.

- Main display. The black square in the centre shows, after setting up the model, the sellers aligned at the bottom, and the network of buyers, above the sellers. The slider at the top lets the user control how fast the model runs
- The market display shows the supply function (blue) and the demand function (red), together with the initial demand (green).
- The "Accessibility Distribution" graph shows a histogram of the accesibility
in a selected number of steps (
*accesibility-steps*). The accesibility of a buyer in*n*steps is the number of social neighbours within her reach going through up to*n*links. For instance, if buyer A links only to buyer B, who links only to buyer C, who has no social neighbours, then A's accessibility in one step is 1, and in two steps is 2; B's accessibility in any number of steps is 1, and C's accessibility in any number of steps is 0. Please remember to click on*Update accessibility*to update the graph after changing the value of*accesibility-steps*.
- The "buyers' surplus" is calculated by summing up, for every buyer who has bought a unit in the session, the difference between her reservation price and the price she paid for the unit she bought. The green dotted line shows the reference value, i.e. the buyers' surplus if there were no quality variability.
- The "sellers' surplus" is calculated by summing up, for every seller who has sold a unit in the session, the difference between the price at which the unit was traded and the seller's minimum selling price. The green dotted line shows the reference value, i.e. the sellers' surplus if there were no quality variability.

Select a

**MEQU** was developed by Segismundo
S. Izquierdo and Luis R. Izquierdo. The authors would like to gratefully acknowledge
financial support from the Scottish Executive Environment and Rural Affairs
Department and from the SocSimNet project 2004-LV/04/B/F/PP.

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