Product Market Competition With Crypto Tokens and Smart Contracts
39 Pages Posted: 12 Jun 2019 Last revised: 17 Sep 2019
Date Written: September 15, 2019
This paper models benefits to entrepreneurial ventures of issuing crypto tokens and of using smart contracts in the presence of duopolistic product market competition with switching costs. The model features an incumbent, able to build a customer base prior to competing with an entrant, which can price its output in either fiat currency or crypto tokens. Issuance of tokens by the entrant and commitment to accept them as the sole means of payment for its product results in the entrant's fiat-currency-equivalent equilibrium output price being always marginally lower than the incumbent's price. This mitigates the incumbent's incentives to price aggressively to capture the demand of unattached customers, and raises the entrant's equilibrium profit. In addition, the entrant's commitment to fixed future output price in units of crypto token (e.g., by means of a conditional smart contract) can act as a de-facto capacity constraint, reducing the incumbent's incentives to build a large base of attached buyers, further raising the entrant's profit in equilibrium. In markets in which the mass of potential customers grows fast enough, the incumbent is better off also issuing crypto tokens and accepting them as the exclusive means of payment for its product. For slower growing industries, the incumbent is better off pricing its product in units of fiat currency.
Keywords: crypto tokens, smart contracts, product market competition, switching costs
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