The microeconomics of microprocessor innovation

Survey of Current Business, March, 2008

Kenneth Flamm (University of Texas, Austin). Discussant: Paul Thomas (Intel Corporation).

This paper develops a technique that can be used to apportion improvements in an index of quality-adjusted price between changes in nominal prices and quality improvements in the high-tech product. Detailed data on prices and physical, electrical, packaging, and architectural features of Intel desktop PC processors is used to estimate hedonic price indexes and to construct a quality-adjusted price index. The index shows that a slowdown in the rate of decline of quality-adjusted prices for Intel microprocessors occurred during and after 2003. Potential contributions of manufacturing technology gains, architectural innovation, and software improvement are also analyzed; implications for R&D investment strategies in computing technology are summarized.