Upstream Innovation and Product Variety in the U.S. Home PC Market

This paper investigates the welfare implications of the rapid innovation in Central Processing Units, and, specifically, asks whether it results in inefficient elimination of basic Personal Computer configurations. I analyze a game in which firms make multiple discrete product choices, and tackle challenges such as partial identification and sample selection. The estimated model implies that the demand for PCs is highly segmented. Using this model, I find that Intel's introduction of its Pentium M chip contributed significantly to the growth of the mobile PC segment and to consumer welfare. The lion's share of these consumer benefits were enjoyed by the 20% least price-sensitive consumers. The Pentium M crowded out the Pentium III and Pentium 4 technologies. I find that keeping those products on the shelf could have increased the welfare of price-sensitive consumers, but sizable fixed costs offset these benefits