The Pinocchio Effect, Economies of Scale and Market Concentration in AI

Artificial intelligence (AI) has the potential to augment workers’ productivity, causing demand to rise for some types of work, and decline or even be eliminated entirely for others. The rise in productivity and accompanied efficiency has significant implications for economic growth and wage distribution according to Acemoglu. And those are important considerations.

But today's substack will shift focus to market concentration and market power in product markets. I will argue that there are two factors that I think warrant close attention by economists: one on the supply side and one on the demand side. They work together and will, I predict, lead to natural monopolies in the control of AI, but only a handful at most. The supply side explanation (economies of scale) is straightforward but the demand side explanation (which I call the “Pinnochio Effect”) is less straightforward.