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How Much Better is Bigger, Faster & Cheaper? Buyer Benefits from Innovation in Mainframe Computers in the 1980s

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  • Kenneth H. Brown
  • Shane M. Greenstein

Abstract

This paper develops and estimates cost-of-living indexes (e.g., Fisher and Griliches [1995]) for measuring buyer benefits from technical change in the commercial mainframe computer industry in the 1980s. For this purpose we use a micro-econometric model of demand for product characteristics embodied in a computer system. The model highlights buyers' benefits from technical change when innovation decreases the price of characteristics or increases the range of available characteristics. This exercise follows in the spirit of Trajtenberg [1989]. Our main finding is that our utility-based cost-of-living index declines rapidly (approximately 10-15 percent per year). By historical standards for innovation, this rate is quite fast. Second, our estimates contrast with the rate of change in quality adjusted prices in mainframe computers (approximately 25-30 percent per year). Third, while large price declines induced increases in purchasing, most buyers began the 1980s with a 'small' mainframe system and still bought a small system at the end of the decade, even with rapidly declining mainframe prices and large extensions in computing capacity. The experience of the majority outweighs the benefits received by a few (with elastic demand), who took advantage of lower prices and extensions in the product space.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5138.

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Date of creation: May 1995
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Handle: RePEc:nbr:nberwo:5138

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  1. Berndt, Ernst R. & Morrison, Catherine J., 1992. "High-tech capital formation and economic performance in U.S. manufacturing industries : an exploratory analysis," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 3419-92., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Martin Neil Baily & Robert J. Gordon, 1988. "The Productivity Slowdown, Measurement Issues, and the Explosion of Computer Power," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 347-432.
  3. Bartik, Timothy J, 1987. "The Estimation of Demand Parameters in Hedonic Price Models," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(1), pages 81-88, February.
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Cited by:
  1. Inoue, Tetsuya, 1998. "Impact of Information Technology and Implications for Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 16(2), pages 29-60, December.
  2. Alastair Cunningham, 1996. "Measurement Bias in Price Indices: An Application to the UK's RPI," Bank of England working papers, Bank of England 47, Bank of England.

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