Investing.com — Competition may intensify or drop off sharply due to AI, depending on whether the advantages of dominant incumbents compound or the most successful adapters pull far ahead, Goldman Sachs analysts said in a note, adding that AI impact itself depends on the competitiveness within the industry as well as on the status quo it disrupts.
In the note, the analysts discuss globalisation, regulatory environments, and economies of scale as factors likely modulating the potential impact of AI on concentration and corporate profitability.
The economics of the AI revolution might be comparable to that of electricity or the internet, where there are huge gains on an aggregate level accompanied by uneven capture. Transformative technologies like railroads, electricity, and the internet have historically produced broad gains in productivity while rewarding the infrastructure owners with concentrated profit capture.
But another possibility this time around is that data and distribution end up mattering more than model quality over time, Goldman Sachs said. If frontier models become commoditised, then open-source competition and model diffusion will likely compress pure model margins. In this environment, firms with proprietary enterprise data, workflow integration, distribution, and customer lock-in will be able to secure durable profitability.
Corporate concentration across the U.S. and advanced economies around the world has increased according to data from over a century of tax and administrative records. In the U.S., the expansion of larger firms in finance, manufacturing firms, information, retail, and eventually wholesale trade have driven concentration steadily since the 1930s.
Goldman Sachs says there are three competing theories that try to explain concentration.
One hypothesis posits that globalisation and trade allowed larger firms to capture a disproportionate share of gains from expanded market access. Another hypothesis has it that weaker antitrust enforcement and higher regulatory barriers to entry allows some firms to enjoy insulation from competition. Yet another hypothesis says concentration is a consequence of a few firms being able to leverage economies of scale and capture larger market shares.
Goldman Sachs finds the third hypothesis, namely economies of scale and market share capture, as the most compelling explanation for concentration.
“Across advanced economies, concentration has risen more rapidly during periods of faster technological change. Consistent with this, productivity dispersion has widened following technology shocks, with frontier firms extending their lead—particularly in technology-producing sectors and in industries most transformed by new technologies, such as online retail,” the analysts said.
While profit margins have increased in recent decades, only one-third of this increase is explained by higher concentration. The analysts note that US firms raised markups substantially as higher incomes made consumers less sensitive to price differences, and reduced the prevalence of price comparison across sellers. Also, rising concentration led to reduced competition nationally if not locally.
The firm sees the AI disruption impact as bearing two-sided implications on concentration and corporate profitability. Industries most exposed to AI currently are also more concentrated and enjoy higher margins. AI disruption will likely create greater competition among them. However, as history shows, technology, along with the intangible capital involved in deploying it, tends to raise network concentration as the leading firms come to enjoy scale and network effects.