Moore's Law, Competition and Intel's Productivity in the 1990s

In the mid-1990s, a pickup in measured productivity growth for the semiconductor industry coincided with an economy-wide acceleration in labor productivity growth. The pickup in semiconductor markets reflected an increase in the growth of real output that was generated by what Dale Jorgenson (2001) called an “inflection point” in the price indexes for the semiconductor industry. Jorgenson hypothesized that the inflection point reflected increases in the rate of product innovation made possible by an increase in Moore’s Law, a stylized description of technology that currently states that the number of electrical components on a chip will double every eighteen months. Within semiconductors, microprocessors (MPUs) produced by Intel—the world’s largest producer of the chips that serve as a computer’s central processing unit—were the primary contributor to the inflection point in the semiconductor index. The inflection point in the price index coincided with two changes in the price contours for Intel’s chips. First, price contours for Intel’s chips became steeper around 1995. Because most price index formulae boil down to functions of weighted averages of price change, steeper price contours translate directly into more rapidly declining price indexes. At the same time, the product lifecycle for MPUs—the length of time chips are sold in the market—shortened and Intel began to introduce chips more frequently. What caused these changes in pricing and product cycles? This paper provides a simple framework to help gain some intuition on these issues. The model provides a set of conditions under which an increase in Moore’s Law is consistent with both of these stylized facts. In the model, an increase in Moore’s Law raises the quality of future chips relative to today’s chips. If consumers view these chips as substitutes, then increases in the quality of tomorrow’s chips push down the prices for today’s chips and can, under certain conditions, generate an inflection point in the price index. However, the framework also suggests that changes in the attributes of contemporaneous substitutes can have the same effects. Thus, the model suggests that increases in the quality of competitor’s chips can generate an inflection point through the same channel. This is an important possibility to consider because Intel faced increasing competition from AMD beginning in the mid-1990s, about when the inflection point occurred.