Why artificial intelligence is creating fundamental challenges for competition policy

The rapidly evolving market for artificial-intelligence services is apparently thriving and very competitive, with a growing number of AI start-ups and ever larger and more capable AI models. Investors are pouring large amounts of money into start-ups and into a few big tech firms that have the large financial resources and computing capacity that constitute key inputs to the production and running of AI-driven services. However, exponentially growing AI model training costs create a market entry barrier for AI start-ups, forcing them to cooperate with big tech firms to get access to computing infrastructure and end users. At the same time, their AI models compete with those of the big tech firms. Competition authorities investigate these co-opetition agreements, looking for market-distorting clauses. Beyond computing costs, other competition choke points in the AI supply chain include access to dedicated AI processor chips and training data. Strict enforcement of copyright on data may further tighten an already scarce supply of affordable training data. Policymakers have few, if any, effective tools to deal with these potential competition bottlenecks in AI industries. Co-opetition agreements are necessary to enable AI start-ups to access hyperscale and costly computing infrastructure. At the same time, the agreements give big tech privileged access to the latest AI models. Competition authorities can try to minimise market-distorting provisions in these agreements but there are technical and economic limits to the extent of fragmentation in the AI value chain that can be meaningfully imposed on big tech firms. Licensing fees for copyright-protected data further tighten the already scarce supply of affordable data. It is hard to implement a fair market-clearing mechanism for dedicated AI processors. If model training costs continue to grow exponentially, as appears to be the case for the foreseeable future, the entire competition policy setting for AI industries may need a revision, with collaboration, including between big tech firms, dominating competition to keep the pace of AI innovation going.