Artificial Intelligence in Microeconomics: Machine Learning for Demand Estimation and Pricing
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This paper looks at how artificial intelligence (AI) is used in microeconomics. It focuses on two tasks: estimating demand and setting prices. The literature review covers three areas. Machine learning (ML) is used to make predictions in economics. Pricing algorithms can change prices in some markets. Generative AI helped workers complete tasks faster in several studies. The paper then uses a computer simulation to test one question: does a firm earn more profit when it uses an ML demand model instead of a standard regression? In the simulation, a firm used one of three models to choose its price. With 2,000 observations, gradient boosting (an ML method) reached 99.0% of the best possible profit. Linear regression reached 96.0%, and log-log regression reached 90.7%. With 100 observations, the gap between methods was smaller and the ML results varied more.
Keywords
Algorithmic Pricing, Artificial Intelligence, Demand Estimation, Machine Learning, Microeconomics