The Impact of Generative Artificial Intelligence on Market Equilibrium: Evidence from a Natural Experiment
This study addresses the debate on AI's displacement effects in creative markets, showing it can benefit all stakeholders in platform economies, though it is incremental as it applies existing methods to a new context.
The paper investigated the impact of generative AI on market equilibrium using a natural experiment from an art outsourcing platform in China, finding that it caused a 64% reduction in average prices, a 121% increase in order volume, and a 56% increase in overall revenue, with benefits primarily from low-end personal orders and retained by incumbent creators.
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.