Microprocessors: the economics of new process technology

Survey of Current Business, March, 2008

Unnikrishnan Sadasivan Pillai (University of Minnesota). Discussant: Daniel Sichel (Federal Reserve Board).

Intel's choices about the size of transistors and how many to put on a microprocessor are governed by the timing of the adoption of new manufacturing processes that reduce the size of the smallest feature that can be etched on a microprocessor. Assuming a Poisson process for the arrival of innovations that reduce this feature size, the paper characterizes Intel's optimal adoption policy and its pricing, engineering, and production decisions. The paper estimates the underlying demand and (1) quantitatively compares Intel's policy with the socially optimal policy and (2) estimates the welfare consequences of changes in Intel's decisions caused by shocks to demand and by an investment subsidy.