Moore's Law, Competition and Intel's Productivity in the Mid-1990s Moore's Law, Competition and Intel's Productivity in the Mid-1990s

1 Ana Aizcorbe In the mid-1990s, measured productivity growth for the semiconductor industry showed a pickup that coincided with an economy-wide acceleration in labor productivity growth. This pickup in semiconductor markets stems from an increase in the growth of real output that was, in turn, generated by what Dale Jorgenson (2001) called an " inflection point " in the price indexes for the semiconductor industry. Jorgenson further hypothesized that the inflection point reflected increases in the rate of product innovation made possible by an increase in Moore's Law, a stylized description of technology that currently states that the number of electrical components on a chip will double every eighteen months. Within semiconductors, microprocessors (MPUs) produced by Intel— the world's largest producer of the chips that serve as a computer's central processing unit—were the primary contributor to both the trend and inflection point in this price index in the 1990s. Pricing and product cycles for Intel's chips also changed in the mid-1990s. As shown in the top panel of figure 1, price contours for Intel's chips became steeper around 1995. Because most price index formulae boil down to functions of weighted averages of price change, steeper price contours translate directly into more rapidly declining price indexes. Hence, the inflection point reflects the change in the contours seen beginning in 1995. At the same time, the product cycle for MPUs—the length of time chips are sold in the market—shortened and Intel began to introduce chips more frequently. This is seen in the lower panel, where horizontal lines depict the lifespans for Intel's chips, plotted against the speed of the chip. What caused these changes in pricing and product cycles? This paper provides a stylized model that shows a set of conditions under which an increase in Moore's Law is consistent with both of these stylized facts. In the model, an increase in Moore's Law raises the quality of future chips relative to today's chips. Under the assumption that consumers view these chips as substitutes, increases in the quality of tomorrow's chips push down the prices for today's chips and can, thus, generate an inflection point in the price index. With regard to product cycles, the model predicts that increases in the rate of product introductions and reductions in chips' market lives can simply be a monopolist's profit-maximizing response to an exogenous increase in Moore's Law. Thus, the model provides support for the …