The Economics of Large Language Models: Token Allocation, Fine Tuning, and Optimal Pricing

Dirk Bergemann, Alessandro Bonatti and Alex Smolin
Additional contact information
Alessandro Bonatti: Massachusetts Institute of Technology

No 2425, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We develop an economic framework to analyze the optimal pricing and product design of Large Language Models (LLM). Our framework captures several key features of LLMs: variable operational costs of processing input and output tokens; the ability to customize models through fine-tuning; and high-dimensional user heterogeneity in terms of task requirements and error sensitivity. In our model, a monopolistic seller offers multiple versions of LLMs through a menu of products. The optimal pricing structure depends on whether token allocation across tasks is contractible and whether users face scale constraints. Users with similar aggregate value-scale characteristics choose similar levels of fine-tuning and token consumption. The optimal mechanism can be implemented through menus of two-part tariffs, with higher markups for more intensive users. Our results rationalize observed industry practices such as tiered pricing based on model customization and usage levels.

Pages: 43 pages
Date: 2025-02-11
New Economics Papers: this item is included in nep-ain, nep-cmp, nep-com, nep-des and nep-mic
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cowles.yale.edu/sites/default/files/2025-02/d2425.pdf (application/pdf)

Related works:
Working Paper: The Economics of Large Language Models: Token Allocation, Fine-Tuning, and Optimal Pricing (2025)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cwl:cwldpp:2425

Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.

Access Statistics for this paper

More papers in Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University Yale University, Box 208281, New Haven, CT 06520-8281 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Brittany Ladd ().