Measuring Consumer Welfare in the CPU Market: An application of the pure characteristics demand model

The personal computer Central Processing Unit (CPU) has undergone a dramatic improvement in quality, accompanied by an equally remarkable drop in prices in the 1990s. How have these developments in the CPU market affected consumer welfare? This paper estimates demand for CPUs and measures consumer welfare, using the pure characteristics demand model. The model is based on a quasilinear utility function with multiplicative random variables, and does not have the idiosyncratic logit error term, so that consumer welfare directly reflects consumers’ valuation of product characteristics. Welfare calculations show that consumer surplus makes up approximately 90% of the total social surplus and that a large part of the welfare gains comes from the introduction of new products. ∗This paper is a revision of the second chapter of my Ph.D. thesis. I especially thank Ariel Pakes, Gary Chamberlain, and Dale Jorgenson for their valuable advice and support. I also thank John Asker, Steve Berry, Liran Einav, Gautam Gowrisankaran, Matthew Gentzkow, Hugo Hopenhayn, Jason Hwang, Markus Mobius, Julie Mortimer, Amil Petrin, two anonymous referees, and seminar participants at Brown University, Georgia Institute of Technology, Harvard University, NBER, and University of Rochester for their helpful comments. I am grateful to Steve Berry and Ariel Pakes for sharing their search algorithm used to estimate the pure characteristics demand model with multiple coefficients. All errors are mine.