Academic journal article AEI Paper & Studies

How Fast Are Semiconductor Prices Falling?

Academic journal article AEI Paper & Studies

How Fast Are Semiconductor Prices Falling?

Article excerpt

1. Introduction

How fast are semiconductor prices falling? Data from the Producer Price Index (PPI) for the United States suggest that prices of microprocessor units (MPUs) have barely been falling in recent years. This very slow rate of price decline stands in sharp contrast to the rapid declines in MPU prices reported from the mid-1980s up to the early 2000s and the exceptionally rapid declines in the latter half of the 1990s. If correct, the apparent slowdown in MPU price declines in recent years would be troubling, given the long-run relationship between rates of price decline for semiconductors and the pace of innovation in that sector. (1)

A stalling out of innovation in this sector likely would have broader implications for the economy, as semiconductors are an important general-purpose technology lying behind machine learning, robotics, big data, massive connectivity, and many other ongoing advances. (2) Indeed, adverse developments in the semiconductor sector ultimately would damp the growth potential of the overall economy. (3) On the other hand, if technological progress and attendant price declines were to continue at a rapid pace, powerful incentives would be in place for continued development and diffusion of new applications of this general-purpose technology.

The apparent slowdown in the rate of price decline is puzzling given evidence that the performance of MPUs continued to improve at a rapid pace after the mid-2000s. The key to resolving the puzzle may reside in another development in the semiconductor industry. Roughly coincident with the shift to a slower pace of price decline in the PPI, Intel--the leading MPU producer--dramatically changed its pricing and model introduction behavior. Prior to the mid-2000s, Intel generally introduced new chips at the technological cutting edge and lowered the list prices of existing chips to remain competitive on a price-performance basis. However, by 2006, Intel had shifted to a new paradigm in which it largely kept the list prices of existing chips unchanged and began introducing new chips both at the frontier and at lower performance levels.

These changes in Intel's behavior could resolve the puzzling disconnect between recent continuing improvements in MPU performance and trends in prices. Namely, we argue that the widely-used matched-model methodology is not well suited to capturing price trends in a regime where producers are setting prices as Intel has since the mid-2000s. In such a pricing regime, if performance is improving over time, then matched-model price indexes--like the PPI for MPUs--likely are biased. We argue that hedonic indexes are better suited to capturing price trends in these circumstances and develop new hedonic indexes for quality-adjusted prices using price data for Intel MPUs from 2000 to 2012. Our preferred index tracks the PPI closely from 2000 to 2008. However, from 2008 to 2012--the period after Intel's new pricing regime was in place--our preferred index of MPU prices fell at an average annual rate of 39 percent, while the PPI declined at only a 9 percent rate.

We focus on MPUs, rather than a broader set of semiconductor products, for several reasons. (4) First, MPUs are a large segment of the semiconductor sector, representing about half of U.S. shipments (the scope of the PPI). Second, price series for MPUs extend back to the mid-1980s, allowing for comparisons of price trends over time. Given that price trends in this sector often are used to infer rates of technical progress, this historical comparability is important. Finally, we believe that developments in MPU technology likely provide a rough guide to developments in other parts of the semiconductor sector, such as the chips that are used in smartphones and tablets. (5)

Our work on MPU prices builds on important earlier research. Much prior work on semiconductor prices relied on physical characteristics of the chips to control for quality. …

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