The Impact of Generative Artificial Intelligence on Market Equilibrium: Evidence from a Natural Experiment

TL;DR

This study empirically examines how generative AI affects market equilibrium using a natural experiment in China's art outsourcing sector, revealing significant price reductions, increased demand, and market shifts favoring incumbents.

Contribution

It provides the first causal evidence of generative AI's impact on market prices, demand, and stakeholder benefits through a natural experiment approach.

Findings

64% reduction in average prices

121% increase in order volume

56% increase in revenue

Abstract

Generative artificial intelligence (AI) exhibits the capability to generate creative content akin to human output with greater efficiency and reduced costs. This groundbreaking capability, however, has ignited a debate regarding its potential to displace human creators. In light of these discussions, this paper empirically investigates the impact of generative AI on market equilibrium, in the context of China's leading art outsourcing platform. We overcome the challenge of causal inference by identifying an unanticipated and sudden leak of an advanced image-generative AI as a natural experiment. This leak precipitated a notable reduction in the production costs of anime-style images compared to other genres, thereby providing a unique opportunity for difference-in-differences comparisons. Our analysis shows that the advent of generative AI led to a 64% reduction in average prices, yet it simultaneously spurred a 121% increase in order volume and a 56% increase in overall revenue. This growth is primarily driven by the rising demand for "low-end" personal orders, rather than commercial orders. Moreover, incumbent creators retain the majority of the market share and reap the most benefits of generative AI. Our research highlights the potential of generative AI to benefit all stakeholders across the platform economy, yielding both scholarly contributions and practical implications.