An algorithm for economic simulation?

Question

I would like to create a game where the players create differents products with different prices (call it offers), and I give them a certain number of customers (call it demands).

Now, I want an algorithm to decid what's the market share of each players. Of course, I could just make mine right now, using random. But before doing this, I prefer to ask, because I'm sure that's a lot of people already tried to do this before me!

My question is not really precise, it's because your answer doesn't need to be precise too ;)

Thank you in advance!

Answer 1

It really depends on the variables you have set up, and the kind of "market" you want to create. You could start with the following simple formula below (which fundamentally reduces market share to a question of profits) as a start, and I'll go through what I mean by "kind of market" after.

marketShare = totalCompanyProfit/allMoneyInProductCategory;
marketShare = ( (productSalePrice * demand)-(productManufactureCost * supply) ) / allMoneyInProductCategory;

It gets interesting here because the "kind of market" is determined by your definition of demand. For example, say the product was ferraris, and the market you were trying to simulate was the Republic of Congo, which had a GDP of $189/capita.

targetMarketSize = (percentOfFittingDemographic * totalPopulation)
percentWhoHateYourProduct = AVERAGE( ( ABS(productVariable1 - variableIdeal1) / variableIdeal1 ), ( ABS(productVariable2 - variableIdeal2) / variableIdeal2 ), etc )
demand = (targetMarketSize) * ( 1- percentWhoHateYourProduct ) 

percentOfFittingDemographic is the percent of the population which fits into the demographic which would buy such a product (i.e people with enough disposable income to afford $100,000 car), which in the Congo example above could be something like .001 .

The average of the absolute value of the difference of certain product attributes (productVariable) from their ideals (variableIdeals) over their ideals give the % of the population which are going to be turned off by the product not being what they want. Subtracting that from 1 gives the percent of people who DO want to buy your product, and multiplying that by targetMarketSize gives you the people who want to buy your product- ie demand. If the product is perfect, it becomes the average of 0's, and the whole target market becomes a user of the product.

One could also add weighting to the average to say, for example, that the market prefers a lower price over a bigger screen size. To imply that more of one attribute increases the desire for the product in a population (i.e instead of "one month of free service", you give away "6 months of free service", and people want it more), you could add it into the average with

percentLikesProductNow =  1 - e^(-1 * infinitelyLikedAttribute)

This goes from 0% at infinitelyLikedAttribute=0, to about 0.005% at infintelyLikedAttribute=10, so you could play around and find a way to "scale" that attribute to roughly be between 1 and 10. This does sort of make sense with real life, because there are products I would never have bought if they didnt have a free trial. For example: 3 free months of verizon internet. I would have probably gone with comcast otherwise, as I only was living there for 6 months, but saving 100 bucks was pretty big at the time. At the other extreme however, if verizon were to offer me 100 free years of internet, another 50 extra years on top of that (assuming it's not transferable, etc) really doesn't add much more to the attractiveness of the offer.

You can always multiply all of these things with a random number generator as well, to maybe give it a +/- 15% variance, and keep everyone guessing :)

I hope this was even remotely useful :)