Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System

77 Pages Posted: 28 Aug 2017 Last revised: 28 Jan 2021

See all articles by Gur Huberman

Gur Huberman

Columbia Business School - Finance and Economics

Jacob Leshno

Chicago Booth

Ciamac C. Moallemi

Columbia Business School - Decision Risk and Operations

Multiple version iconThere are 3 versions of this paper

Date Written: September 30, 2020

Abstract

Bitcoin provides its users with transaction-processing services which are similar to those of traditional payment systems. This paper models the novel economic structure implied by Bitcoin's innovative decentralized design, which allows the payment system to be reliably operated by unrelated parties called miners. We find that this decentralized design protects users from monopoly pricing. Competition among service providers within the platform and free entry imply no entity can profitably affect the level of fees paid by users. Instead, a market for transaction-processing determines the fees users pay to gain priority and avoid transaction-processing delays. The paper derives closed-form formulas of the fees and waiting times and studies their properties; compares pricing under the Bitcoin Payment System to that under a traditional payment system operated by a profit-maximizing firm; and suggests protocol design modifications to enhance the platform’s efficiency. The appendix describes and explains the main attributes of Bitcoin and the underlying blockchain technology.

Keywords: Bitcoin, blockchain, monopoly, deadweight-loss, queueing, two-sided markets, market design, cryptocurrency

JEL Classification: D40, D20, L10, L50

Suggested Citation

Huberman, Gur and Leshno, Jacob and Moallemi, Ciamac C., Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System (September 30, 2020). Columbia Business School Research Paper No. 17-92, Available at SSRN: https://ssrn.com/abstract=3025604 or http://dx.doi.org/10.2139/ssrn.3025604

Gur Huberman

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

Jacob Leshno (Contact Author)

Chicago Booth ( email )

5807 S. Woodlawn Ave
Chicago, IL 60610
United States

Ciamac C. Moallemi

Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States

HOME PAGE: http://moallemi.com/ciamac

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