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=== Conditions of perfect competition === * '''The market is deep''' β This means there are a large number of buyers and sellers. Primary DAOs are open, meaning anyone on the planet may participate if they follow the transparent protocols using freely available open source technology. * '''Zero transaction costs''' β This means buyers and sellers do not incur costs in making an exchange of goods. In theory smart contracts can minimize costs to neglible amounts due to contemporary computing power. However, in practice, most existing Web3 platforms, such as Ethereum, have charged expensive fees for transactions. This is due to bad incentive design for the maintenance of previous platforms, and not an inherent property of P2P technology (e.g., Skype started as a free P2P video conferencing app that took advantage of the low cost of contemporary computing power in 2003). We use DGF to create [[Block producer DAO|block producer DAOs]] designed with balanced incentives for minimizing transaction costs to further the community's goals of profiting from authentic economic activity. Free transactions for the public can be motivated, for example, by paying nodes in REP tokens for other DAO activities which require distributed computing to achieve decentralized business. * '''No barriers to entry or exit''' β Primary DAOs are open, which means both entry and exit can be made free of sunk costs. However, for security, some DAOs may choose to add protocols which require more or less onerous onboarding requirements for entry, participation, and exit. [[Graceful Exit BOND market|Graceful Exit BOND markets]] support barrier free exits which allow members to immediately cash out with zero threat to the governmental stability of the DAO they are leaving. DAOs which choose this option are opening an attack vector, however, since members who cash out their REP immediately in trade for BONDs cannot subsequently be slashed. * '''Perfect information''' β This means all consumers and producers know all prices of products and utilities they would get from owning each product. This prevents subDAO firms from obtaining any asymmetric information which would give them a competitive edge. The transparency associated with DAOs leads to extremely symmetric information. * '''Well-defined property rights''' β These determine what may be sold, as well as what rights are conferred on the buyer. In the context of a primary DAO, property rights are nearly perfectly defined by code. The major caveat is that [[judicial governance]] makes review possible. * '''Rational buyers''' β This means buyers make all trades that increase their economic utility and make no trades that do not. In order to be decentralized and open, DAOs are required to have maximal bureaucratic transparency concerning all interactions inside and outside the group. This transparency allows more accurate audits of every business transaction, allowing free and open access to information about the market a DAO creates, so that public buyers can have maximal knowledge and understanding of market information, which encourages rational buyer behavior. Combined with openness, this gives buyers equal opportunity to make trades. * '''Profit maximization of sellers''' β Firms sell where the most profit is generated, where marginal costs meet marginal revenue. * '''Every participant is a price taker''' β Decentralization implies no participant has market power to set prices. Each DAO must negotiate with other DAOs for all business. However, market price negotiations requires decision making. Decision making in a DAO requires agile governance. Traditionally, decentralized organizations have a much more difficult time coming to a decision than a centralized organization, which requires only one person to decide. Thus DGF focuses primarily on making effective and efficient governance processes for DAOs. * '''Homogeneous products''' β This means all products are perfect substitutes for each other (i.e., the qualities and characteristics of a market good or service do not vary between different suppliers). In DGF DAOs are designed to police each work contract to guarantee that it is in line with their standards using the Validation Pool. * '''Anti-competitive regulation''' β DAOs under default DGF protocols inhibit anti-competitive activity by governance which encourages equal access to work through openness and by using availability smart contracts which choose random members for work. * '''Perfect factor mobility''' β In the long run, factors of production are perfectly mobile, allowing free long-term adjustments to changing market conditions. This means, for example that workers may freely move between firms, which are in such supply that no monopolies exist for any sub-products. The openness of primary DAOs allows any members to join or leave at will. And DGF is a framework for creating DAOs. This means that primary DAOs, because they are by definition open source, can be cloned at will, so there is an environment which encourages strong competition. However, since the regulatory process in DGF is complete, any possible regulatory scheme is expressible with smart contracts. This means a DAO can prevent certain actions. Combined with first mover advantage and the network effect, we see that large old DAOs have some economies of scale, at least in attention. So while factor mobility in a DAO is far more perfect than any managed economy, it is not absolute. * '''Non-increasing returns to scale''' β This means there are no economies of scale from making larger subgroups in the market, that rewards are linear. The basic design of DGF workflow ensures that REP tokens have linear powers. E.g., a member with twice as many tokens has twice as much likelihood of being chosen with an Availability smart contract, for example. No economies of scale also ensures that there will always be a sufficient number of firms in the industry. With a large enough talent pool, and with low enough transaction costs, economies of scale are eliminated. With the ability to clone open source primary DAOs which fail to provide services that are demanded, sufficient numbers of competing firms can be created to give perfect competition. * '''No network effects''' β In economics this means<ref>Oz Shy (2010)''The Economics of Network Industries'', Cambridge University Press.</ref> that products are limited materially which allows competition to be meaningful. For example the production of shoes have no network effects, since they cannot be shared by customers and it costs the producer twice as much to make twice as many. However, radio transmission is an example of an industry with strong network effects. For example, it costs no more to transmit radio to one person within a mile of a radio station than it costs to transmit to 1000 people who live within that same mile. And the more people who use the radio station, the more valuable the service for advertising becomes, though there is no difference in cost to the radio station to produce the advertisement for one listener or for many. There is a network effect that benefits the radio station for each new listener without adding to its costs to operate. Under DGF, the typical DAO will experience many strong network effects since many products can be automated and copied. So in this regard, DAOs do not provide an environment for perfect competition, and in fact generate a great deal of free content, which we consider to be the commons of the Web3 environment, for which there is zero competition. However, assuming a DAO provides specialized work for each customer according to [[DAO Governance Framework#DGF workflow|DGF workflow]], then a primary DAO has absolutely no network effects, as proven by the fact that REP tokens are minted precisely in proportion to the fees a member earns for the DAO. In this regard, DGF provides another quality of perfect competion that makes it close to an ideal perfect market. * '''No externalities''' β This means costs or benefits of an activity do not affect third parties. A common example illustrating the meaning of an [[wikipedia:Externality|externality]] in economics is pollution. When an industry pollutes, the costs are not borne by the producer nor the customer, but they ''are'' borne by larger society (the third party). This criterion prevents the need for government intervention to account for the cost to the larger society. It is difficult to identify what externalities abstract primary DAOs would have in general. However, the no externalities criterion is an ideal quality of an economic model and not a quality that is perfectly achievable in practical organizations. Therefore it is important to be continually vigilant of any externalities that any DAO may have on the economy, and take responsibility for mitigating any harm it causes. To achieve this, governance is necessary, which is why creating a framework for responsive governance is of primary concern under DGF. An analogy that economists use for explaining the idea of perfect competition is that it is the ideal in a similar way as how physicists use the frictionless vaccuum as a basis for models of mechanics. From the analysis above, we conclude that primary DAOs generally form far more perfect markets than any legacy business environment. In fact, the current difficulty with Web3 is to create some of the inertia and friction necessary to create history.
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