Rapid Change in the Personal Computer Market

Many economists feel that the government consumer and producer price indexes may be overestimating the effect of inflation since the indexes likely do not account properly for the extremely rapid technological advances in many areas. One of these areas is personal desktop computers. Although personal computers have only been available for approximately ten years, their technical quality characteristics (RAM, clock speed, disk storage, etc.) have improved by several orders of magnitude. Their prices, however, while dropping significantly, have not dropped nearly as fast as their quality characteristics have increased. Thus, a method is needed to isolate the pricing effects from the quality change effects. One way to do this is to create an Hedonic Price Index. The hedonic hypothesis states that a computer transaction is a tied sale of a bundle of quality characteristics, with the price of each computer model directly related to the quantities of characteristics contained within it. In this thesis I compute a quality-adjusted hedonic price index for personal computers (PCs), using over 1100 time series and cross-sectional data points with PC models from over 110 manufacturers. In addition to computing an overall price index, I examine the different pricing policies of several PC manufacturers (IBM, Apple, Compaq, NEC, etc.). The data set is also stratified in several ways to compute price indexes for different subsets of PCs. Further, the value each quality component adds to the overall PC system is computed to determine the relative effect of each component on the overall PC system prices. The personal computer market has been very dynamic. In part this is shown in the final result of an annual average quality-adjusted real price decline of 25.3%. This corresponds to a PC that would have cost over $26,000 in 1976 costing only about $1,000 in 1987. In addition, the rate of decline has varied considerably and this trend of volatility is analyzed to see what implications it may have for PC consumers and manufacturers in the future. Thesis Supervisor: Dr. Ernst R. Berndt Title: Professor of Applied Economics