The semiconductor industry is credited with one of the fastest rates of product innovation and technical change within manufacturing, as chipmakers generate wave after wave of ever more powerful chips at prices not much higher than those of existing chips. This industry has undoubtedly been an important driver of productivity growth as advances in semiconductors paved the way for co-invention in downstream industries that, taken together, provide firms with more efficient ways to do business and the ability to provide new goods and services that ultimately increase consumer welfare. In the mid-1990s, measured productivity growth for the industry shows a pickup that coincided with an economy-wide pickup in labor productivity growth. The acceleration in the semiconductor market stems from an increase in the growth of real output that was, in turn, generated by what Jorgenson (2001) calls an “inflection point” in price indexes for the semiconductor industry. Within semiconductors, microprocessors (MPUs) produced by Intel were the primary contributor to both the trend and inflection point in this price index. This paper explores movements in the price index for MPU chips over the 1990s to better understand sources of the pickup in measured productivity growth. Three major developments in MPU markets that roughly coincided with the measured increase in productivity are reviewed: 1) the introduction of more sophisticated lithography equipment that could have allowed Intel to increase its rate of product innovation; 2) an increase in competitive pressure from AMD; and 3) a pickup in the rate of product introductions at Intel. A stylized framework for decision-making at Intel is developed and used to show that the increase in the rate of product introductions at Intel could have been a profit-maximizing response to increased competition from AMD. The model is then used to explore the implications for price measurement.
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