Determinants of declining prices in memory industries: learning-by-doing vs. market structure∗

A recurring observation in memory industries is declining prices of about 60-70 percent within the first year of production of a new chip generation. Two reasons are made responsible for this pattern: (i) firms climb down a learning curve that induces declining prices, and (ii) firms that enter the product market first earn oligopoly rents. The objective of this paper is to decompose declining prices into these two sources. We estimate industry demand and supply equations for the DRAM and SRAM industries. To what extend learning rates can be attributed to the price decline, depends on the market structure. If there are only a few (up to seven) firms in the market, learning effects amount to 56-87 percent and market structure to 10-33 percent. JEL classifications: C1, L1, L6