Will AI Intensify or Weaken Market Competition?

Hamid Firooz (), Sylvain Leduc and Zheng Liu
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Hamid Firooz: https://www.sas.rochester.edu/eco/people/faculty/firooz-hamid/index.html

No 2026-15, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We study how AI affects market competition based on a general equilibrium framework with heterogeneous firms facing idiosyncratic productivity and variable markups. Firms choose the AI technology subject to fixed costs, where AI production requires data and energy inputs. Our model predicts a non-monotonic relation of AI diffusion with industry concentration. As AI usage rises from an initially low level, large incumbent users gain market share. When AI usage is sufficiently diffused, entry of new and smaller adopters erodes the market share of incumbents, reducing industry concentration. The non-monotonic relations are robust when firms can complement AI with their own data. Our calibrated model predicts that industry concentration is likely to fall if AI adoption increases relative to the current level. In comparison, the relation of AI with the average markup depends on whether increased AI usage is driven by demand or supply factors. Our model also predicts that a modest subsidy of about 3 percent for AI adopter revenues maximizes social welfare, reflecting a tradeoff between aggregate productivity and the average markup associated with AI usage.

Keywords: artificial intelligence; data; heterogeneous firms; industry concentration; markup; productivity; welfare (search for similar items in EconPapers)
JEL-codes: E24 L11 O33 (search for similar items in EconPapers)
Pages: 47
Date: 2026-08-10
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DOI: 10.24148/wp2026-15

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