AI Adoption in a Monopoly Market
18 Pages Posted: 11 May 2022 Last revised: 2 Jun 2022
Date Written: June 2, 2022
The adoption of artificial intelligence (AI) prediction of demand by a monopolist firm is examined. It is shown that, in the absence of AI prediction, firms face complex trade-offs in setting price and quantity ahead of demand that impact on the returns of AI adoption. Different industrial environments with differing flexibility of prices and/or quantity ex post, also impact on AI returns as does the time horizon of AI prediction. While AI has positive benefits for firms in terms of profitability, its impact on average price and quantity, as well as consumer welfare, is more nuanced and critically dependent on environmental characteristics.
Keywords: artificial intelligence, prediction, monopoly, make-to-stock, make-to-order
JEL Classification: D21, D81, O31
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