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

Abstract

The Producer Price Index (PPI) for the United States suggests that semiconductor prices have barely been falling in recent years, a dramatic contrast to the rapid declines reported from the mid-1980s to the early 2000s. This slowdown in the rate of decline is puzzling in light of evidence that the performance of microprocessor units (MPUs) has continued to improve at a rapid pace. Roughly coincident with the shift to slower price declines in the PPI, Intel--the leading producer of MPUs--substantially changed its pricing behavior for these chips. As a result of this change, we argue that the matched-model methodology used in the PPI for MPUs likely started to be biased in the mid-2000s and that hedonic indexes can provide a more accurate measure of price change since then. Our preferred hedonic index of MPU prices tracks the PPI closely through 2004. However, from 2004 to 2008, our preferred index fell faster than the PPI, and from 2008 to 2013 the gap widened further, with our preferred index falling at an average annual rate of 43 percent, while the PPI declined at only an 8 percent rate. Given that MPUs currently represent about half of U.S. shipments of semiconductors, this difference has important implications for gauging the rate of innovation in the semiconductor sector.

KEY WORDS: measurement, hedonic price index, quality adjustment, technological change, microprocessor

We received helpful comments from Ana Aizcorbe, Ernie Berndt, Erwin Diewert, Ken Flamm, Charlie Gilbert, Robert Hill, Dale Jorgenson, Kevin Krewell, Catherine Mann, Chris Nosko, Unni Pillai, Paul Thomas, Neil Thompson, Vincent Russo and other analysts in the Producer Price Index program at the Bureau of Labor Statistics, as well as seminar participants at the Federal Reserve Banks of Boston and Cleveland, the 2013 IARIW/UNSW Conference and Workshop, the NBER weekly productivity seminar, the 2014 CRIW/NBER Summer Institute, and the Wellesley Economics Department brown-bag series. Unni Pillai generously shared MPU performance data from SPEC prior to 1999. The views expressed herein are those of the authors and do not necessarily reflect the views of institutions with which we are affiliated.

1. INTRODUCTION

How fast are semiconductor prices falling? Data from the Producer Price Index (PPI) published by the U.S. Bureau of Labor Statistics indicate 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 accurate, the apparent slowdown in MPU price declines in recent years would be troubling, given the long-run relationship between rates of price decline of 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 advances of the digital revolution, including machine learning, robotics, big data, and massive connectivity. (2) Given this linkage, adverse developments in the semiconductor sector could 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. Such applications could both enhance the economy's growth potential and push forward the ongoing automation that has generated concerns about job displacement. (4)

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. …

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