How Market Structure Drives Commodity Prices

Bin Li, K. Y. Michael Wong, Amos H. M. Chan, Tsz Yan So, Hermanni Heimonen, Junyi Wei and David Saad
Additional contact information
Bin Li: Department of Physics, The Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong
K. Y. Michael Wong: Department of Physics, The Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong
Amos H. M. Chan: Department of Physics, The Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong
Tsz Yan So: Department of Physics, The Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong
Hermanni Heimonen: Department of Physics, The Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong
Junyi Wei: Department of Physics, The Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong
David Saad: The Nonlinearity and Complexity Research Group, Aston University, Birmingham B4 7ET, United Kingdom

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Abstract: We introduce an agent-based model, in which agents set their prices to maximize profit. At steady state the market self-organizes into three groups: excess producers, consumers and balanced agents, with prices determined by their own resource level and a couple of macroscopic parameters that emerge naturally from the analysis, akin to mean-field parameters in statistical mechanics. When resources are scarce prices rise sharply below a turning point that marks the disappearance of excess producers. To compare the model with real empirical data, we study the relations between commodity prices and stock-to-use ratios of a range of commodities such as agricultural products and metals. By introducing an elasticity parameter to mitigate noise and long-term changes in commodities data, we confirm the trend of rising prices, provide evidence for turning points, and indicate yield points for less essential commodities.

Date: 2015-08, Revised 2018-01
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Published in J. Stat. Mech. (2017) 113405

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