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Distributed Self-Regulation of Hierarchical Arbitrage-Free Mesomarkets: Towards Knowledge Problem and Informational Role of Money Flow
Lubashevsky I., Lubashevskiy V.
We present a model for the equilibrium state of a hierarchical supply mesomarket based on a single type of raw material. This model illustrates Hayek's knowledge problem, covering dispersed knowledge, the role of the price system, entrepreneurship, and spontaneous order. The mesomarket is depicted as a tree-like network, with nodes representing micromarkets that balance local supply and demand. Edges consist of competing firms at the same production stage, with a large number of firms assumed to be present. The tree root represents raw material producers, and the upper level (tree leaves) represents retail outlets. The output of each firm is measured by the raw material used, enabling the quantification of the mesomarket in terms of raw material flow. Firms maximize profit under the no-arbitrage condition linked to fixed interest rate external investments. Retail outlet trading is driven by end-consumer demand as a function of prices. The mesomarket shows perfect self-regulation, meaning changes in demand for one type of goods do not affect the supply-demand balance for others. This self-regulation is due to the price pattern being dependent only on production process technology and external investment rates. End-consumer demand impacts the number of firms in production. Our findings illustrate the implementation of Hayek's knowledge problem mechanisms. Notably, the price pattern does not directly reflect end-consumer demand; instead, money flow through the network carries this information and enables its self-processing, which is not accessible to individual firms. Lastly, we discuss mesoeconomics as a bridge between micro- and macroeconomics.
Language:
English