by David M. Byrne, Stephen D. Oliner, Daniel E. Sichel
American Enterprise Institute
July 17, 2014
Working Paper Series
The Producer Price Index (PPI) for the United States suggests that semiconductor prices have barely fallen in recent years, a dramatic contrast from the rapid declines reported from the mid-1980s to the early 2000s. This slowdown is puzzling, given that the performance of microprocessor units (MPUs) has continued to improve at a rapid pace. Roughly coincident with the shift to slower price declines, Intel — the leading producer of MPUs — substantially changed its pricing behavior and model introduction strategy for these chips. With the changes in Intel’s pricing behavior, the matched-model methodology used in the PPI for MPUs likely started to be biased in the mid-2000s. Hedonic indexes provide a more accurate measure of price change since then. Given that MPUs represent about half of U.S. shipments of semiconductors, the difference between PPI and a hedonic index has important implications for gauging the rate of innovation in the semiconductor sector.