Firms constantly pursue differentiation strategies to gain a competitive advantage. Artificial intelligence (AI) provides firms with advanced tools that bolster product differentiation, offering potential competitive edges. Yet, the dynamic market conditions mean that competitors might also leverage AI, posing a challenge for the focal firm. We find that AI helps firms differentiate from their rivals and facilitate new market entries. Additionally, we show that its impact on product differentiation is more pronounced among less diversified firms. Furthermore, the future similarity in products between competitors that concurrently adopt AI is contingent on their existing product differences—AI intensifies similarities among similar firms and enhances distinctions among firms that are less similar. Our study reveals the reinforcing nature of AI and provides implications for competitive dynamics literature.
