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Bitcoin: A Natural Oligopoly

Author(s): Arnosti, Nick; Weinberg, S. Matthew

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Abstract: We argue that the concentrated production and ownership of Bitcoin mining hardware arise naturally from the economic incentives of Bitcoin mining. We model Bitcoin mining as a two-stage competition; miners compete in prices to sell hardware while competing in quantities for mining rewards. We characterize equilibria in our model and show that small asymmetries in operational costs result in highly concentrated ownership of mining equipment. We further show that production of mining equipment will be dominated by the miner with the most efficient hardware, who will sell hardware to competitors while possibly also using it to mine.
Publication Date: 2022
Citation: Arnosti, Nick and Weinberg, S. Matthew. "Bitcoin: A Natural Oligopoly." Management Science 68, no. 7 (2022): 4755-4771. doi:10.1287/mnsc.2021.4095
DOI: 10.1287/mnsc.2021.4095
ISSN: 0025-1909
EISSN: 1526-5501
Pages: 4755 - 4771
Language: en
Type of Material: Journal Article
Journal/Proceeding Title: Management Science
Version: Author's manuscript

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