Artificial intelligence adoption in a competitive market

Abstract Economists have often viewed the adoption of artificial intelligence (AI) as a standard process innovation where we expect that efficiency will drive in competitive markets. This paper models AI based on recent advances machine learning allow firms to engage better prediction. Focusing prediction demand, it is demonstrated complement variable inputs whose levels are altered directly by predictions and use economized them (that is, labour). It shown market, this increases short‐run elasticity supply may or not increase average equilibrium prices. Generically, there externalities adoption, with reducing profits non‐adoptees when important, increasing otherwise. Thus does operate innovation, its confer positive non‐adopting firms. In long run, lower prices generally raise consumer surplus