marcelchuo
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Nickel Bitcoiner
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Market Structure of Bitcoin Mining - Perfect competition to Oligopoly into monopolistic competition

Tue Sep 19, 2017 10:37 am

Understanding the history of bitcoin mining has got me thinking about the market structure of bitcoin mining. In Economics we learn that there are four basic market structures each with their own assumptions. Perfect competition where there is perfect information between businesses and consumers and there are no barriers to entry (I'm simplifying). There is an infinite number of small buyers and sellers and there is a dynamic equilibrium of businesses moving in an out of the industry.

Perfect competition seems to be a good representation of the market structure of bitcoin mining when we used to do CPU mining and everyone ran a node on their computer. This was a truly decentralized system. People starting and stopping mining all the time, even though there was a net increase in miners due to market growing. I'm also assuming bitcoin miners to be like businesses but can't figure out who the consumers would be.

Fast forward to today and the market industry is really similar to a stable Oligopoly. We have A few large players in the mining space, with one major leader. Think Jihan Wu setting the standard for mining equipment (e.g. when he released the Dash D3 before Innosilicon releasing their versions. Now Jihan's releasing the Ethereum GPUs. I know these are not bitcoin mining equipment but Jihan sets the standard for those too). An oligopoly is has elements of the prisoner's dilemma where businesses must choose whether to collude or not to collude. I think this is still a decentralized system but far less compared to perfect competition.
Side note: I respect Jihan Wu a lot and don't think he is colluding with anyone.

Yet the mining industry is evolving into monopolistic competition. Not to be confused by it's name, Monopolistic competition is a market scenario which has more businesses fighting for market share compared to an oligopoly but not as much as perfect competition. I'm saying this because we can see Russia and Japan making huge moves entering the mining industry. Again the market is moving to be more decentralized and will continue to move in this direction.

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