Perfect competition v Monopoly. Crypto mining as a form of perfect competition.

Perfect competition.

With perfect competition there are a number of assumptions.

• Large numbers of buyers and sellers
• Free entry and exit of firms.
• Standardized products.
• They all have perfect information.
• There are no transport costs
• Firms act independently.

With all of these assumptions in place, the markets will balance themselves out to the point where there is a normal profit to be had. If there are large profits to be made, with free entry into the market you will see more firms join that market and increase the supply. That will drop demand and drop the price with the added competition. All of these factors will keep the market in balance to the point that the people creating supply will all be making the same profits.
All of the different factors involved lead to a high level of competition for the available profits and with the same amount if information and free entry into the market, you will see firms that enter to take a share of that profit. When there is money to be made in any particular area, you will find people willing to enter that market and make a profit.

Monopoly.

For a monopoly to occur you might see the following characteristics.

• Only one seller.
• The seller determines the price.
• There are barriers to enter the market.
• There is complete product differentiation.
• There might not be perfect information.
• Location can be a defining characteristic of a monopoly.
• The sellers will try to maximise their profits.

Since one firm controls the supply into the market. They set the price and the profits that they take. The only thing that they need to factor in is how many units they could sell at any given price and maximise the profit by setting the best price to sell the most units. There is an abnormal profit to be taken by a monopoly as without competition to lower the price, the firm producing the goods can maximise profits rather than having to match the market.

That is why perfect competition is better for the consumer than a monopoly as they will have more choice and access to better prices.

This creates a more efficient market as competition drives production. A competitive firm needs to operate at full efficiency to realise a profit. A monopolist firm can operate at less than full efficiency as lack of supply form the firm will just drive demand further. If there is a guaranteed demand, they can limit supply with the intention of driving the pricing market and increasing profit without extra input.

To finish of the lesson this week, we have been asked to discuss the similarities between the cryptocurrency mining market and a market in perfect competition.

To compare the cryptocurrency mining market to any market we need to look at the industry in terms of a free market. Costs, revenue, profits, supply and demand.
Even if the market does not fit any of the traditional models we would see in the textbooks it is still a source of supply and demand. Miners create a supply and demand is determined by the free markets. It can be shown that there are a large number of buyers and sellers for top crypto’s and this can be seen on any of the current marketplaces.

Mining is a free market to enter and all you need is the proper equipment and knowledge to create a mining rig and become a supplier. The more people that enter the mining market, the lower their portion of that supply will be. At any given time there is a price point that it becomes unprofitable to mine.

Thirdly, there is a fixed number of one cryptocurrency that can be distributed between miners in one period of time. Therefore, when more and more miners are starting to mine one particular cryptocurrency, the reward for the previous computing power, known as “hashing power,” is continuously decreasing.
Ref: Characteristics of crypto mining, Podobas,W.J.

This information is available to all parties and the industry is very transparent as a whole to people looking to get involved in it. Blockchains are a store of information with freedom of access and the ability for anybody to get involved in the production. It currently had zero restrictions such as time, location, legislation that hiders access to the markets over here. This provides an ideal example of perfect competition as there are no other industries that can be jumped into with miniscule resources, no limitations, no permissions and no restrictions. Miners are run independently to each other and the whole system is only connected by their access to the network.

Photos.
Ref: Pixabay

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