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

TL;DR

This study uses a natural experiment from an unanticipated leak of an anime-focused generative AI to identify causal effects of generative AI on market equilibrium in China’s art-outsourcing platform. Employing a difference-in-differences design with a treated anime market (tachie) and a control wallpaper market, it finds that AI reduces average prices by $64 ext{%}$ while increasing order volume by $121 ext{%}$ and total revenue by $56 ext{%}$, with all effects statistically significant. Demand analysis shows the upturn is mainly driven by personal orders (low-end demand) rather than commercial orders, while supply-side results indicate incumbents capture the bulk of new business post-leak (about $97 ext{.}4 ext{%}$ of orders and $97 ext{.}9 ext{%}$ of revenue). The paper contributes to the economics of AI by providing one of the first causal estimates of AI's impact on a platform economy and offers practical guidance for creators and platforms to harness AI-enabled productivity gains, as well as policy implications for job creation and tax revenue through increased activity.

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.

Figures (4)

• Figure 1: Model-free evidence. The three graphs show the trajectories of average price, order volume, and overall revenue for the "wallpaper" and "tachie" (anime character paintings) markets. The dashed lines represent the leak moment of an advanced anime generative AI, which only affects only the "tachie" market. The post-leak landscape is intriguing: While the "tachie" market experiences a dip in price, it experiences a surge in both volume and revenue, marking a departure from the intuition of job replacement and illustrating the transformative potential of generative AI for market prosperity.
• Figure 2: Search Engine Trend of AI Painting (Blue), Stable Diffusion (Green), and NovelAI (Orange).
• Figure 3: Market Equilibrium of Personal and Commercial Orders in the "tachie" Market
• Figure 4: An illustration of the style and quality of NovelAI's AI-generated images.