AI prices are plunging. That feels bad, but something else is happening.
After OpenAI slashed AI model prices, it boosted usage and revenue, illustrating Jevons Paradox where cheaper costs drive higher consumption.
The cost of artificial intelligence (AI) is rapidly decreasing, which may initially appear as negative news for the industry. However, a closer examination reveals a more positive development. OpenAI, a leading AI company, has recently reduced the price of its GPT-5.6 Luna model by 80% and the mid-range Terra model by 20%. These price cuts have led to a significant increase in usage, with early evidence suggesting that the opposite is happening.
A study by TD Cowen analysts found that after the price reductions, the effective price of using Luna dropped by around ten times, while its consumption increased about 14 times. Similarly, Terra's effective price fell by roughly three times, and its usage rose about five times. When AI usage is measured in tokens, which are the smallest units of information processed by models, the most striking aspect is that usage grew faster than prices fell.
TD Cowen estimates that OpenAI's revenue from Luna increased by around 34% compared to the seven days preceding the price cut, while Terra's revenue rose by about 45%. The Luna situation is particularly notable, as it is uncommon for a company to generate more revenue after slashing a product's price by 80%. This phenomenon aligns with Jevons Paradox, an idea named after 19th-century economist William Stanley Jevons.
Jevons observed that improvements in the efficiency of coal use did not reduce coal consumption; instead, they often increased it dramatically. When a useful resource becomes cheaper, people tend to find more uses for it. In the tech industry, this pattern has been observed with computers, which have become more powerful and affordable, leading to widespread adoption and increased revenue.
The same pattern may be unfolding in the AI industry, with lower prices making it economically viable to use AI for tasks that were previously too expensive.
The falling cost of producing AI tokens, due to more efficient computing systems, will further drive down AI prices. While it is too early to determine whether the revenue boost will persist, the emerging lesson is clear: as AI becomes cheaper, more of it will be used.
Written by urgent.news from Business Insider's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
