Johnny Lee

GPT4.5: Good or not, its launch is good for the LLM serving business

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GPT-4.5 launched as a preview last Thursday. GPT-4.5 topped benchmarks like LMArena, only to be matched by Grok-3 shortly after.


Regardless of the reception on quality, OpenAI’s decision to roll out their largest model to the market is a clever business maneuver. 


OpenAI is the undisputed market leader in the LLM serving business. The company projected $3.7B in revenues in 2024. Its closest competitor–Anthropic–was projected to have closed 2024 with $1B in revenues.


GPT 4.5 is the most expensive API model on the market today, and also OpenAI’s most expensive model to-date.

  • Prompt tokens are $75 per 1M tokens 
  • Completion tokens are $150 per 1M tokens


Previously, OpenAI’s short-lived GPT 4 (32k context) (launched March 2023) was the most expensive model:

  • Prompt tokens were $60 per 1M tokens 
  • Completion tokens were $120 per 1M tokens 
  • GPT 4’s 8k context variant is 50% cheaper, at $30/$60.


Price dynamics in a competitive market


In competitive markets, pricing decisions have massive impacts on the market’s overall profit potential. 


This is especially true in markets with oligopoly characteristics. When a select few suppliers control the market, one firm’s decisions can dramatically change the profits of the entire market.


In many ways, these markets present a classic prisoner’s dilemma, especially if the products are fairly interchangeable. 


Take the classic gas station example. 

  1. There is one small town with only 3 gas stations.
  2. They likely have similar cost-structures. Wholesale gasoline costs the same amount. 
  3. Given a small town, the demand is relatively predictable as price fluctuates. 


The best profit outcome (for the gas stations) is if all 3 firms cooperate (collude) to keep prices high. In a prisoner’s dilemma, this is the “collusion” outcome: no one goes to prison if no one cooperates with the police. 


  • They can reach what is known as a high molopoly profit position (not possible with a competitive market at equilibrium). 
  • This profit can be generated by raising prices to the level where demand and price maximizes profits. 
  • The town will still be willing to buy gasoline at some high price, but at some lower volume. The higher prices will more than compensate for the lower volume.


The worst profit outcome (for the gas stations) is if 1 gas station lowers prices to generate more demand for their own gas station. 


  • Then, other gas stations will lower prices to stay competitive, which is a race to the bottom. 
  • The small town now has cheaper gas, but the gas stations likely make much less profits.


Outright price collusion is illegal, but signaling and tacit collusion is not


For the players in consumer technology, price fixing is not new. Because of its attractiveness, examples are plentiful.


Yet, there are legal ways to accomplish cooperation, and also proven to work via game theory. Here are some examples:


  • Price leadership: In a small market, firms implicitly and simply follow the leader. The leader will signal price levels first. For example, Apple often sets the market leading levels for high quality smart phones around the world, and others follow the price levels. 
  • Price matching: Retailers will put in-place “price matching” programs. Signaling to others that, as long as others set a high price, they will follow. 
  • Advanced notice of new supply: For slow moving markets like aircraft manufacturers (i.e. Boeing vs. Airbus), they will publicly announce order books of not-yet developed aircraft types. Such that, it does not lead to a supply glut that tanks the market.


GPT4.5 signals price level for leading frontier models, its closest competitor is signaling too


As the most expensive API model on the market, OpenAI is definitively setting the price for this class of leading edge models. When the market leader moves, others in the market will take note.


Its second place competitor (Anthropic) has not yet released a similar class model. 


Though, Dario Amodei, Anthropic’s CEO, has doubled down on a new phrase: “race to the top”.


Now, that may be in the context of model safety and responsibility. 


But, if OpenAI reads the tea leaves, and it may understand there is potential willingness to cooperate tacitly. 


For these firms, their current gross margins are too good to leave unprotected.