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Two AI markets: frontier and commodity
Frontier intelligence
Frontier intelligence is a duopoly, and it is still a horse race. Anthropic looked as if it was running away with it, with a monster IPO coming, until OpenAI's new model made it a two-horse race again. OpenAI's growth rate accelerated around the middle of the year, which lines up with its 5.6 models.
Commodity intelligence
Commodity intelligence includes all the open models. They compete on price, and their prices are significantly lower.
The convergence ahead
Capabilities at the frontier are expected to be matched or nearly matched by a handful of closed alternatives and open source alternatives within the next three or four months, while the cost of each incremental unit of intelligence keeps falling.
How fast are AI prices falling?
Epoch AI analyzed the price of reaching a fixed level of performance on language model benchmarks and found it fell between 9 and 900 times per year, depending on the benchmark. The median decline was about 50 times per year. The drop comes from cheaper chips, better algorithms, and smaller models that match the results of older, larger ones.
How do open models catch up to frontier ones?
Published research spreads techniques quickly, and researchers move between labs. Smaller models can also be trained on the outputs of larger ones, a method called distillation, which transfers much of the larger model's ability at lower cost. Stanford's 2025 AI Index reported that the performance gap between the best closed and open-weight models on a popular chatbot ranking narrowed from about 8 percent to under 2 percent in a year.
Why do commodity products compete on price?
When products are close substitutes, buyers have little reason to pay more for one, so sellers undercut each other. Economists model this with Bertrand competition, named for the French mathematician Joseph Bertrand, who analyzed it in 1883. In that model, firms selling identical goods drive prices toward their cost of production.
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