Bergemann, Dirk, Bonatti, Alessandro and Smolin, AlexORCID: https://orcid.org/0000-0003-4740-2376 (2025) Menu Pricing of Large Language Models. TSE Working Paper, n. 25-1670, Toulouse

Preview

Text Download (741kB) | Preview

Abstract

We develop an economic framework to analyze the optimal pricing and product design of Large Language Models (LLM). Our framework captures several key features of LLMs: variable operational costs of processing input and output tokens; the ability to customize models through fine-tuning; and high-dimensional user heterogeneity in terms of task requirements and error sensitivity. In our model, a monopolistic seller offers multiple versions of LLMs through a menu of products. The optimal pricing structure depends on whether token allocation across tasks is contractible and whether users face scale constraints. Users with similar aggregate value-scale characteristics choose similar levels of fine-tuning and token consumption. The optimal mechanism can be implemented through menus of two-part tariffs, with higher markups for more intensive users. Our results rationalize observed industry practices such as tiered pricing based on model customization and usage levels.