Working paper

The Economics of Large Language Models: Token Allocation, Fine-Tuning, and Optimal Pricing

Dirk Bergemann, Alessandro Bonatti, and Alex Smolin

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.

Keywords

Large Language Models; Optimal Pricing; Menu Pricing; Fine-Tuning;

JEL codes

  • D47: Market Design
  • D82: Asymmetric and Private Information • Mechanism Design
  • D83: Search • Learning • Information and Knowledge • Communication • Belief

Reference

Dirk Bergemann, Alessandro Bonatti, and Alex Smolin, The Economics of Large Language Models: Token Allocation, Fine-Tuning, and Optimal Pricing, TSE Working Paper, n. 25-1670, October 2025.

See also

Published in

TSE Working Paper, n. 25-1670, October 2025