Shut down or not: A case study on Chat GPT and OpenAI

Sevin Karabulut

This blog will use Chat GPT and Open AI as a case study to corroborate knowledge and provide a real-life example of short-run costs in businesses.

Defining the Short-Run

The short-run refers to when at least one of the inputs is fixed. For example, rent, contracts and salary agreements limit a firm in adjusting production. Firms can increase output by hiring variable input, labour, in the short run.

In perfect competition, a firm will shut down in the short-run if the market price falls below firm’s average variable cost (AVC). However, the firm will continue operating in the short-run if price is above AVC, despite not being able to cover average total cost (ATC), as it can cover variable costs and contribute to covering fixed costs to minimise total losses. 

Chat GPT and OpenAI Example


(OpenAI image)

OpenAI’s ChatGPT, released on the 30th of November 2022, provides a good case study of a firm. Albeit not perfectly competitive, the firm has not shut down despite making losses since its release.

While ChatGPT generated more than $788 million in revenue in 2023, they operated at a loss of $540 million that same year (approximately $700,000 loss per day). This figure includes fixed and variable costs. Following the theory of perfect competition, OpenAI’s decision to keep ChatGPT running despite substantial losses is because its revenue covers AVC; as mentioned, as long as variable costs are covered, some fixed costs will also be covered, thereby minimising total loss and justifying their decision to continue operating.

Moreover, by continuing to operate, ChatGPT is increasing its user base, demonstrating how OpenAI sees significant potential for future revenue. This is even shown as ChatGPT was initially offered for free, where millions of users began using the program and became reliant on it for day-to-day work. However, from the 10th of February 2023, OpenAI introduced a subscription of $20 a month. Additionally, they have now limited access to the program’s premium features, which includes but is not limited to unlimited messages, unlimited image generation, advanced data analysis, and ability to customise a user’s ChatGPT. This can all only be obtained through the subscription.

By running ChatGPT despite substantial short-run losses, OpenAI is positioning itself to generate much more profit in the future. As demand for AI-driven tools continues to grow and individuals, businesses, and the government are becoming increasingly reliant on them. OpenAI’s strategy exemplifies how covering variable costs in the short-run can pave the way for long-term gains.

Further Reading, Similar Cases:

  • Spotify: continue to operate at a loss since their release, prioritising growth and gaining market share.
  • Amazon: operated at a loss for several years, prioritising growth and gaining market share.
  • Netflix: operated at a loss for several years, prioritising growth and gaining market share.

About the Author

Sevin is a Business with Law student in her second year. With an interest in law, economics, and business operations, she will aim to explore ways the law influences economic policies and current affairs.

Contact details for any questions or collaboration: bs23254@qmul.ac.uk


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