Why Are Semiconductor Price Indexes Falling So Fast?: Industry Estimates and Implications for Productivity Measurement

By any measure, price deflators for semiconductors fell at a staggering pace over much of the last decade, pulled down by steep declines in the deflator for the microprocessor (MPU) segment. These rapid price declines are typically attributed to technological innovations that lower constant-quality manufacturing costs through either increases in the quality of the devices or decreases in costs. However, Intel’s dominance in the microprocessor market raises the possibility that those price declines could also reflect changes in Intel’s profit margins.

This paper uses industry estimates on Intel’s operations to decompose a price index for Intel’s MPUs into three components: quality improvements, reductions in costs, and changes in markups. The decomposition suggests that 1) virtually all of the declines in a price index for Intel’s chips can be attributed to quality increases associated with product innovation, rather than declines in the cost per chip. Of course, these increases in quality pushed down constant-quality costs. However, cost per chip did not play a role in generating the observed price declines in the MPU price index, as cost increases associated with the introduction of new, higher quality chips more than offset cost reductions associated with learning economies. With regard to markups, the sizable decline in Intel's markups from 1993-99 only accounted for about 6 percentage points of the average 24 percent decline per quarter in a price index for Intel’s chips. Consistent with the inflection point that Jorgenson(2000) noted in the overall price index for semiconductors, the Intel price index falls faster after 1995 than in the earlier period but, again, the decomposition attributes virtually all of the inflection point to an acceleration in quality increases.