While the 'effective' price of AI has dropped 78% in two years, almost none of that gain comes from price cuts to existing models.
April 1, 2026
Original Paper
Who Captures AI Deflation? Quality-Adjusted Prices, Markups, and Pass-Through in AI Services
SSRN · 6426025
The Takeaway
We assume price drops come from competition making old things cheaper. In the AI market, 'deflation' is driven almost entirely by the release of new, exponentially more capable models, meaning if you aren't upgrading constantly, you aren't seeing any of the cost savings.
From the abstract
AI inference costs are falling rapidly, yet how much of this deflation reaches downstream firms depends on market structure. I construct the first constant-quality price index for AI services and show that, once quality improvement is accounted for, effective AI prices fell by approximately 78 percent from early 2024 through early 2026, roughly twice the nominal price decline. The AI services market is oligopolistic, and markups meaningfully moderate cost transmission: GPU cost pass-through is p