Mert Demirer is an Assistant Professor at the MIT Sloan Applied Economics Group and a Faculty Research Fellow at the National Bureau of Economic Research. Prior to joining MIT Sloan, he was a Postdoctoral Researcher at Microsoft Research. Professor Demirer received his PhD in economics from MIT in 2020.
Professor Demirer works in the field of empirical industrial organization. His research focuses on firm productivity, use of digital technologies by firms, antitrust, and productivity effects of generative AI.
Abstract
We document six facts about the structure and dynamics of the LLM market using API usage data from OpenRouter and Microsoft Azure. First, we show rapid growth in the number of models, creators, and inference providers, driven by open-source entrants. Second, we show price declines and persistent price heterogeneity across and within intelligence tiers, with open-source models being 90% cheaper than comparable closed-source models of the same intelligence. Third, we document market dynamism, with frequent turnover among leading models and creators. Fourth, we present evidence of horizontal and vertical differentiation, with no single model dominating across use cases, and demand for intelligence varying widely across applications. Fifth, we estimate preliminary short-run price elasticities just above one, suggesting limited scope for Jevons-Paradox effects. Finally, we show that although the share of firms that use multiple models increased over time, most firms concentrate their use on a single model, consistent with experimentation rather than persistent reliance on multiple models.
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