Impact of Increasing Firms' Consumer Demand Perceptions on Market Outcomes

The rapid evolution and spread of artificial intelligence (AI) and algorithms significantly improve companies’ recognition of consumer demands. AI and algorithmic big data analyses have been introduced into firms’ practical decision-making and marketing activities. However, there are insufficient empirical analyses available to determine the impact of improving a firm’s cognitive ability (via algorithmic data analyses) on actual market outcomes (price formation, each firm’s surplus, and social surplus). Using a laboratory experimental approach, this study examines the market outcomes, such as the degree of product differentiation and prices, when firms utilize an algorithmic demand-forecasting system in a duopoly. The results indicate that the forecasting system increases the cognitive abilities of the participants regarding their consumers’ preferences. Additionally, the introduction of the algorithmic demand-forecasting system increases the consumer surplus in the market.