N°25-37: Is It AI or Data That Drives Market Power?

Artificial intelligence (AI) is transforming productivity and market structure, yet the roots of firm dominance in the modern economy remain unclear. Is market power driven by AI capabilities, access to data, or the interaction between them? We develop a dynamic model in which firms learn from data using AI, but face informational entropy: without sufficient AI, raw data has diminishing or even negative returns. The model predicts two key dynamics: (1) improvements in AI disproportionately benefit data-rich firms, reinforcing concentration; and (2) access to processed data substitutes for compute, allowing low-AI firms to compete and reducing concentration. We test these predictions using novel data from 2000–2023 and two exogenous shocks—the 2006 launch of Amazon Web Services (AWS) and the 2017 introduction of transformer-based architectures. The results confirm both mechanisms: compute access enhances the advantage of data-intensive firms, while access to processed data closes the performance gap between AI leaders and laggards. Our findings suggest that regulating data usability—not just AI models—is essential to preserving competition in the modern economy.